Rarely does a day go by where I don’t hear of an estate planning blunder that could have been easily avoided.
These plans sound great when you make the dumb move. You need to know that your error shall survive until you don’t – and then things can hit the fan.
Most common is the misuse of joint ownership. Many elders know that settling an estate without a will can be time consuming and expensive. They also know that property owned jointly with rights of survivorship will avoid probate. Probate is avoided because there is nothing to do, the joint owner becomes the exclusive owner of that property, be it a bank account or the family home.
When asked, most elders tell me that their joint owner, typically a son or a daughter, will gladly share the account with their siblings after the dust settles. My experience is that the joint owner frequently has the nerve to look their siblings in the eye and say, “of course I now own this asset, that’s how Mom wanted it”. The other siblings frequently get a lot less than Mom wanted or nothing at all. And if the joint surviving owner does follow through with Mom’s desires, and does indeed square up with their siblings, there may be other tax consequences.
The process of squaring up may be considered a gift for tax purposes. In real estate, there’s a possibility that the remaining owner will be saddled with a low cost basis and incur capital gains taxes when later selling the asset. Mom’s effort to simplify things may have actually caused a lifetime of family conflict.
I feel that financial institutions should also shoulder some of the blame for this negligence. When you go to the bank with your daughter to add her name to your account, why didn’t anyone explain the potential conflicts that this may create for the family? Why didn’t they suggest a transfer on death account or the use of a trust?
With real estate, most people would go to a lawyer to help with the title change. Before the deed change is drafted and recorded, the hired attorney should spend a few moments explaining the tax consequences and the possible family conflict with those not on the receiving end.
While we are picking on attorneys, I frequently see beautiful fake leather bound estate documents eloquently packaged. But when you peel back the onion, none of the assets were ever put into the trust or directed there by way of a beneficiary election. This is more common that most would think. The penalties of this lapse (or poor service) is that your estate will have to go through probate in order to get to your assets to the trust, and that will once again run up your legal bill.
This information is not intended to be a substitute for individualized legal advice.
John P. Napolitano CFP®, CPA is CEO of Napier Financial in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.