In our monthly no-cost seminars, we always start the conversation with two basic questions: What is an "estate?" and What does it mean to "probate" an estate? The answers to both questions are straight forward: an estate is everything you leave behind and probate is the legal process we use to take care of those things.
Invariably, we hear from the group one or more questions about avoiding probate and, most often, their concerns are about the costs of probate. Understandably, every person we meet is concerned about the cost of any legal process; as a result, it is not uncommon for us to hear about shortcuts people take to avoid probate and pass on assets to their heirs without having to go to an attorney or go through any legal process.
And while there are good reasons, and good ways, to transfer assets at your passing without going through probate, it is absolutely critical to pass on those assets in the proper way. Too often, the shortcuts we see are risky, and very often, more costly.
In a common example, some parents want a child to take ownership of their home and sign a deed to that child while the parents are still alive. The idea is normally that when the last of the parents pass away, that child can sell the home and split the money among all of the children. And, in the process, they avoided the cost of probate.
That plan may work because there will be no need to probate that asset, but of course, if there are other assets in the parents' names that do not get transferred to a child or a third person, then probate will be necessary to get those assets out of the parents' names and into the names of their heirs.
But a much bigger problem lies in wait; when the parents transferred the home to the child, they did avoid the cost of probating the estate for that asset, but in so doing, they created a situation that may be much more costly to resolve. That situation will arise, and the costs could skyrocket, when the home is sold.
At that time the home owner (now, the child) will be responsible to pay taxes on the profit from that sale. So, what is the "profit" on the sale? It is the increase in the value of the home from the time the parents bought the home to the time it was sold. If the home was purchased for $150,000, and is later sold for $350,000, the seller (again, the child) may end up paying taxes on the $200,000 increase in value.
However, had the parents passed on the home through probate, it is possible that no taxes would be due. In that situation, the "short cut" to avoid probate could cost the family several thousand dollars more than if the parents had simply passed on the home through the normal legal process.
And the financial cost is only one of the risks this family faces. For instance, once the child is on title to the house, that child's creditors can, in an extreme situation, take control of the house to pay the child's debts. Of course, no one intended that outcome, but without help, this family could cause problems far greater than those they were trying to avoid.
We discuss these, and other, estate planning matters in our no-cost seminars. Our next seminar is at 3 p.m. Wednesday, Nov. 20. There will be limited seating (no more than eight people), so that we can focus on the specific questions of a small group.
If you are interested in attending the seminar, or if you have any questions about this article or topics you would like us to address in future columns, send an e-mail to admin@GJlawyer.com or call 970-270-1213, ext. 4.
Brad Wright's business and estate planning practice includes transactional and litigation matters with a special focus on estate planning and business succession. His brother, Steve Wright, has a similar law practice in Idaho Falls, Idaho, and, together, they assist people with all types of estate matters and businesses of all sizes and types with a wide variety of legal issues.
© 2019 Brad R Wright, Steven J Wright