Estate Planning Disasters – by the “Do It Yourselfers”
I’m a do it yourselfer. This is okay when you are painting the bathroom or planting bushes. I wouldn’t try to re-roof my house or install a new driveway.
There are times to do it yourself, and there are times to get professional assistance. Without that assistance, a disaster can result. This is penny wise and pound foolish.
The most common disaster involves the desire by an elderly parent to avoid probate. Accordingly, he or she transfers real estate to the children during his or her lifetime. Did this avoid probate? Yes. But it creates a disastrous capital gains nightmare for the children.
Assume that dad purchased a home long ago for $50,000. Today, it is worth $350,000.
If the property were transferred to the children at the death of dad, they would take the property at the date of death value of $350,000. Therefore, if they were to sell it soon afterward, there would be no capital gain on the sale of the home.
If, however, dad transfers the property to the children prior to his death, to avoid probate, they will receive the property with a basis of dad’s $50,000 purchase price. If they sell shortly after dad’s death for $350,000, they will have $310,000 of capital gain, and will have to pay income tax upon that gain.
A little bit of professional advice could have saved these beneficiaries a bundle.
Another common mistake when trying to place the property into joint names is to forget to state, “joint tenants with rights of survivorship.” Without this language, it is tenants in common and when dad dies, his estate still owns an interest in the property. The property will have to go through the probate court process with all the costs associated with it. Again, a little advice could save thousands.