Estate planning, like many legal matters, is something where there are many ways to accomplish any given goal. Just like meeting any legal, financial or medical need, there are techniques that are safe and reliable, and there are methods that are risky and filled with potential dangers. There are many techniques involving deeds that can transfer real property without requiring probate, but some of them can also cost you or your family thousands in taxes or, worse, cause you to lose the property completely. By working with a knowledgeable estate planning attorney, you can achieve your goals of avoiding probate without putting your home or other property needlessly in jeopardy.
When we have medical issues, we usually go to a doctor to obtain treatment that we can trust is reliable and avoids risky methods of addressing the problem. Consulting an attorney for a legal matter, such as an estate planning need, works similarly. Your estate planning attorney can help you go about addressing your need in a way that you can trust. This type of help in planning can be essential because, for every trustworthy way to meet your needs regarding avoiding probate or accomplishing other objectives, there are as many unreliable traps that can ensnare your estate and your family in a mess that may cost considerable time and money to fix or, worse, lead to an outcome that is different from what you wanted.
With that in mind, here are a just a couple risky probate-avoidance methods that are examples of potential traps that can exist for you:
The pocket deed - This a deed that you execute signing own your home or other real estate to the person you want to have it upon your death. In a perfect world, this method works because the deed doesn't get recorded until you die, so you are able to
continue possessing that property until after your death. Unfortunately, ours is not a perfect world. If, for some reason, that deed gets executed during your lifetime, you could be thrown out of the property immediately.
You could also lose the property if your desired beneficiary gets divorced or is in a lawsuit and the other side discovers that the deed exists. Even if none of these disasters happen, and the property passes after you die, using a pocket deed can still cause your beneficiary to lose valuable tax benefits (the so-called "step up in basis") and have a much larger tax bill if he/she decides to sell.
- Adding your desired beneficiary to your home's deed - Some people seek to avoid probate by simply recording a new deed on their home or other property listing both themselves and their desired beneficiaries as co-owners of the property. In that way, the beneficiary takes 100% ownership of the property when they die.This method is used much more commonly than the pocket deed. A lot of writers have written about the potential downsides of using this method and you may even already recognize this as a risky way to avoid probate. But even if you do already know that this is dangerous, you may not fully realize, at first glance, just how dangerous it can be. Just like with a pocket deed, you have the risk of losing the property if your beneficiary gets sued or gets divorced. With this method, you can also create gift tax problems, since, if your beneficiary paid nothing to you, the IRS views what you've gone as giving a gift of 50% of the property. This means filing various tax forms and possibly paying gift taxes.
In some states, if you still have a mortgage on the property, adding someone to the deed can require you to pay a certain type of real estate transfer taxes on one-half of the outstanding balance of the mortgage. This can potentially amount to thousands of dollars in taxes. Another massive problem that can arise after using this method in some states is that it can cause your property to lose its homestead exemption. Losing a homestead exemption can potentially raise your annual property tax bill by thousands of dollars.
Also, adding your deed makes your beneficiary more than just a silent co-owner during your lifetime. That person has all of the same rights you do. You cannot sell the property, refinance the property or take out another mortgage on the property without the approval of your new "co-owner."