Estate planning is a blueprint for the accumulation, conservation and distribution of assets that accomplish your personal tax and nontax objectives. Action now can strongly influence, if not determine, what will happen to your estate upon your death.
A comprehensive estate plan should always include a review of the titles and beneficiary designations for all assets to ensure they are consistent with your estate planning objectives. Otherwise, unintended consequences may ensue.
Throughout life, you will accumulate financial accounts, real estate, retirement, annuities and other assets. Real estate, especially, can cause serious family conflict when not handled properly with estate planning. Following are three common mistakes can occur with real estate
• Beneficiary deed
Arkansas allows a special type of deed known as a “Beneficiary Deed.” In other states, this deed may be referred to as a “transfer on death deed” or “Lady Bird Deed.” Through this deed, you can designate a beneficiary or beneficiaries who will inherit your real estate outside of probate upon your death. If you have only one child who is not a special needs individual, then this strategy may work well. However, if you have multiple beneficiaries, a beneficiary deed may not be optimal. If multiple individuals own a single piece of real estate, they must agree on the Realtor and sales prices, and until property is sold, owners should contribute equally to maintenance of property. Such a scenario could create more family disputes than might have occurred had property gone through probate, controlled by a single descendant executor.
• All assets except real estate
If you own real estate titled in your name upon your death, then real estate will go through probate before it passes to your beneficiaries – even if a will exists. In Arkansas, the probate process takes a minimum of six months. Before real estate can be sold or distributed, your estate is responsible for paying expenses, such as taxes, insurance, utilities, and general upkeep of the property.
Your estate is also responsible for final debts and expenses, including funeral, court costs and attorney fees. If insufficient cash is available, then beneficiaries will have to find a way to pay costs; however, no legal obligation exists to pay from life insurance proceeds or cash received through POD designations. Clearly, a serious dilemma could exist.
Accordingly, if real estate will be probated, it is advisable to designate cash accounts and life insurance proceeds payable to estate to eliminate such a scenario.
• Gifting real estate
A parent will sometimes transfer ownership of a home or other real estate to a trusted adult child or children through a quitclaim deed, preserving a life estate, in an attempt to avoid probate. Numerous potential exists with such an arrangement.
Gifting: One can gift up to $14,000 per year per beneficiary (2017) without gift tax consequences. If the value of real estate is greater than this amount, then a gift tax return must be filed.
Creditors: Once your child becomes owner of real estate, real estate will become subject to claims of creditors. Accordingly, if your child gets sued or files for bankruptcy, then creditors could attach to real estate. Your real estate could become an issue in a divorce proceeding depending upon how property is titled after receipt.
Capital gains: When you gift an asset during your lifetime, the child inherits your original cost basis as to interest gifted. Conversely, had your child inherited your real estate upon your death, the asset would have received a “step-up” in cost basis on your date of death resulting in possible reduction of capital gains tax upon subsequent sale of real estate.
Use caution when implementing gift strategy with a large or highly appreciated asset unless you have visited with an estate planning attorney or CPA.
Estate planning can be the ultimate gift you provide your loved ones. To ensure its effectiveness, work with a competent professional and review your plan often.
Editor’s note: Vicki Vasser-Jenkins is an attorney with Wright, Lindsey & Jennings, a law firm with offices in Little Rock and Rogers. The opinions expressed are those of the author.