I regularly have people come into my office and say “My estate is simple” and think that not much work will be involved in planning their estate. Their estate plan is usually anything but simple. What you may think is simple is quite different from what I as an estate planner think of as simple.
I consider a simple estate to have three qualifications relating to assets, beneficiaries and inheritance protection:
1. Other than your home and one vehicle, you have less than four accounts or other titled assets with a total value less than $100,000.
2. You have less than four beneficiaries other than your spouse, whom you are treating the same, none of whom are step-children and all of your children are included as beneficiaries.
3. You do not want any inheritance protections for divorce, creditors, re-marriage, governmental benefits, addictions, disability, pets, family cottages, lazy children or any others.
Although probate is not as time consuming and expensive as it once was, your overriding estate planning goal may be probate avoidance. In this case, if you have a “simple” estate, there is a way to avoid probate without the necessity of a trust by using transfer or payable on death beneficiary designations and deeds. If you do not have a simple estate, I do not advise using this technique because it could easily turn into an estate plan that doesn’t work as intended.
You may attempt to do your own estate plan in order to save a few bucks by not paying the attorney to plan it properly. I see many of these plans every year. It typically costs much more for me to fix these plans, than I would have charged you to plan it properly initially. In some instances, there is no way to “fix it” and your family will have to live with your “plan”.
For example, you may be tempted just to add one or more of your kids’ names as joint owners on your bank accounts or other titled financial assets so that they can handle the account for you when you are unable or out of town, and they would also inherit it upon your death. I have seen life savings garnished by judgment creditors of children who were named as joint owners of their parents’ accounts. I have also seen children joint owners refusing to sign off on the sale of Mom or Dad’s home unless they receive “their share” of the proceeds. You probably have also read the stories in the newspaper about greedy joint owners clearing out their parents’ bank accounts.
A better option to avoid probate of these financial assets would be to complete a transfer or payable on death beneficiary designation. In that situation, neither your loved ones nor their creditors will have access to the account during your lifetime, but your loved ones will receive it after you are gone. If you want your loved ones to have access to the accounts for your needs during your lifetime, you can give them a durable financial power of attorney,
The downside of using these beneficiary designations as primary estate planning tools is that you must be extra vigilant with them, especially if you have multiple beneficiaries. I have seen parents who have attempted to equalize the inheritances by naming different children as beneficiaries of different accounts, but inevitably it doesn’t work out as intended when market values and interest rates change or beneficiaries die or become incapacitated. I recommend monitoring these accounts on a monthly basis to make sure they stay in accordance with your plan.
Also, make sure you know what the transfer or payable on death beneficiary designation form says will happen if a beneficiary dies before you do. Sometimes it goes pro-rata to the other beneficiaries. Other times it would go to the deceased beneficiary’s estate, heirs or descendants. Sometimes it even goes back to your estate. It all depends on the fine print that is usually on the back side of the form and there is no standard form. Every form is different.
Titled vehicles on the other hand, are usually not much of a big deal. If the vehicle is valued at less than $60,000, your heirs can take your death certificate and their IDs down to the Secretary of State office and transfer the vehicle into their names without probate. It is not too bad if you only have one, two or even three beneficiaries. But what if you have nine children? Some Secretary of State offices require all nine of the kids to come in to title your vehicle into their names.
Your home is a little more complicated. You may have attempted to do your own estate planning by preparing and recording a quit claim deed naming your kids as co-owners with you. In such instances, I have seen children refusing to sign off on the sale of Mom or Dad’s home unless they received their share of sale proceeds. If your children have any tax or judgment liens, the liens will attach to your home. I have also probated many of these quit claim deed homes because Mom or Dad named their kids as tenants in common instead of survivorship joint owners.
Instead of recording the deed, you may have given your children instructions to take the quit claim deed out of your dresser drawer and record it after your death. What you may not know is that such a deed is actually invalid after your death. If you have not delivered that deed during your lifetime, then that deed is void upon your death. That deed will not transfer clear title to the property. That is not to say that people still don’t do it. But that doesn’t make it valid, proper or supportable if challenged.
Delivery of your deed can either be recording it at the Register of Deeds office or hand delivering it to one of the persons you are naming as a co-owner of the property. If you actually deliver the deed and give it to your children during your lifetime, then it is considered a transfer of the property which has to be reported to your local assessor. This may result in the uncapping of the taxable value to the current state equalized value and the loss of the 18 mil homestead tax break.
A delivered deed must also be disclosed to the Department of Human Services if you or you spouse applies for Medicaid within five years of such delivery. This gift is considered a divestment resulting in a penalty period during which Medicaid would not pay for nursing home care. In these situations, if you don’t disclose a delivered deed, you are engaging in a form of tax or Medicaid fraud which could result in assessment of fines, penalties and interest. Criminal penalties may be also imposed.
The best type of deed to escape all of these pitfalls and also avoid probate in a simple estate is a certain transfer on death deed which is called a ladybird deed. With this type of recorded deed, you transfer a remainder interest in your home to your loved ones and keep a life estate. You retain the right to rescind the transfer at anytime during your lifetime, so it is not considered a completed gift. Upon your death, your loved ones record your death certificate and then they are the legal owners of your home. The deed is not considered a transfer for Federal gift or estate tax purposes until after your death. It is also not considered gift or divestment in the event that you have to apply for Medicaid to pay for nursing home care.
In addition to the transfer on death beneficiary designations and deed, you should also have financial and healthcare powers of attorney and a will. Your financial and healthcare powers of attorney keep you out of probate court in the event you became mentally incapacitated. The will is going to be used as a backup in the instance one or more of your attempts to avoid probate fails. It is good to plan for all contingencies.
If you are attempting to do a pure probate avoidance simple estate plan in this manner, you should do it with the advice and guidance of a qualified estate planning professional. If you try this on your own, you will generally get what you pay for.
By: Matthew M. Wallace, CPA, JD
Published edited August 14, 2011 in The Times Herald newspaper, Port Huron, Michigan as: Keeping an estate plan simple not without risks