Even with the best estate plan, things can go horribly wrong if care is not taken in attention to the titling and maintenance of assets. The following is a list of mistakes that can disrupt or place your estate plan at a disadvantage.
Naming children on your deed: People often do this in an attempt to bypass probate, however, this creates problems on several levels. In placing a child on a deed during your life, you have given a “carry-over” basis in the property instead of the “step-up” in basis he or she would have received had you kept the property through your death. For example, if you’d paid $100,000 for your property but it was worth $500,000 when you died and your child decides to sell it, the fact that the child’s name had been placed on the deed prior to your death could subject him or her to paying capital gains tax on the $400,000 appreciation. If the child’s name was not on the deed, but the child took title via your will, trust or a beneficiary deed made and recorded while you are alive, the child would have received the stepped-up basis; and when sold for $500,000 would have zero gain to report on the sale. Additionally, you have now subjected that property to the child’s creditors, divorce, IRS problems, lawsuits, etc., and it could also make it difficult for you to receive public benefits should you need them.Naming one child on a deed will, or beneficiary designation and telling them to distribute the assets equally to their siblings: This, again, subjects the entire property given to that child’s creditors, divorce, IRS problems, lawsuits, etc., and if the child dies before the distributions are made, the distributions may be legally impossible to make. If the child becomes disabled, the asset may be required for his or her care with grave consequences if it is not entirely used for that named child. Even if the child does make the distributions, the child has very likely now made a taxable gift of what would not have been taxable had the ultimate beneficiaries just been named in the will or trust.The titling of assets does not match your intent in regard to your will or trust distributions: Many people do not realize that property they own as joint tenants with another person or persons will not be directed by their will or trust on their death. A surviving joint tenant owns the jointly held property immediately upon the other joint tenant’s death. The survivor will then be able to direct that property as he or she wishes – no strings attached. If an individual wishes to own property with another while still keeping a portion of the property to pass on after his or her death, the title must be held as tenants in common.Naming a trust or estate as the beneficiary of an IRA, annuity or other retirement-type benefit: Occasionally, there are reasons to name an owner’s estate or trust as the beneficiary of a retirement benefit; but unless done in a way that meets complex IRS rules and acceptable beneficiaries, this can create a very negative tax result. For the best tax result, name an individual or individuals as beneficiaries, listing contingent beneficiaries should the primary beneficiary predecease you. If you must name a trust or estate as a beneficiary, you should consult a specialist in this area.Not having a discoverable record of automatic payments: You may know what you have set up for automatic payment against your accounts, but would your agent under a power of attorney? I recently heard of a woman who shut down her 89-year-old father’s bank account and moved funds as part of her taking over management of his affairs. Unfortunately, his major asset was a term insurance policy with the premium set up on an annual automatic payment schedule from the closed account. Had her father made a list of assets, accounts and automatic payments from accounts, the loss of this policy may have been prevented.Although this list is not exhaustive, I’d encourage you to periodically review your estate plan, check deeds, beneficiary designations, and note automatic payment schedules. Make those changes necessary to ensure the management and distribution of your assets will be consistent with your wishes.
Melissa Delio is a Durango estate planning and probate attorney. She is licensed in Colorado and California and a member of the Wills and Trusts Section of the American Bar Association, Colorado and California Bar associations, and the Christian Legal Society. Reach her at delio@frontier.net.
