Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle. This episode of Legal Tea is a cautionary tale – a real-life case with real-life people with real-life facts; though names are altered for confidentiality purposes! Today’s specific topic is … transferring assets, i.e. house, money, etc., to a child to “protect it from the nursing home.” Rut-roh, as Scooby says!
In my little estate/elder law world, many try to attempt, sort of, D.I.Y. estate planning – If there’s one thing you don’t want to jeopardize doing wrong, estate planning up there! When someone “messes up” estate planning, guess who wins? The lawyer, Uncle Sam, your State of residency, etc. Guess who doesn’t win? Your beneficiaries … your family … and your Executor’s sanity…
So let’s talk about a recent example of a client that thought the planning they were doing made sense, was a win-win, was the best for everyone involved, etc. But turns out, they were wrong. Let’s name this client – Beatrice. Ol’ Beatrice had a friend who “lost everything to a nursing home” so to protect her and her family, Beatrice transferred her house to her three children. When I say transferred the house, I mean … she literally Deeded the house from her name to her children’s names.
Some time passes … then bam! Her magnificent plan went sideways – one of her children passed away. To clarify, Beatrice and her other two children were still living. You see … property like a house, land, etc. (we call it “real property” in lawyer world) operates differently than most assets. What do I mean by this? Let’s chat about it…
Think of a joint bank account – maybe it’s a joint bank account between you and your spouse …. Or you and your child …. You get the point. If one of the joint owners passes away, the account naturally and legally defaults in ownership to the surviving joint owner. Easy peasy, right?
That’s not how real property like a house works – instead, property gets transferred totally how the Deed is written up. And all too many people try to whip up Deeds without professional guidance – and they get themselves in trouble because they don’t know that there are different types of REAL property ownership – and those different types play out very uniquely if an owner passes.
There are 3 types of property ownership for a house, land, etc. Let’s run through them quickly:
1. Joint Tenants w/ Rights of Survivorship – This means that 2 or more individuals own the property and if an individual passes, the property stays with the surviving individuals. If we have Bob, Tom, and Cliff as Joint Tenants w/ Rights of Survivorship, Cliff dies, Bob and Tom now own the property – it doesn’t go according to Cliff’s estate plan or anything.
2. Tenants by the Entirety – This operates just like the Joint Tenants w/ Rights of Survivorship, but it is exclusively reserved for married couples. So if Bob and Mary are married, Mary dies, the property automatically stays with Bob. Sometimes, on a Deed is merely says “husband and wife” – if so, in Indiana it’s presumed that it defaults to the Tenants by the Entirety classification.
3. Tenants in Common – This means that every owner owns a respective interest – so say we have Bob, Tom, and Cliff and they own a property as Tenants in Common. Bob owns 1/3, Tom owns 1/3 and Cliff owns a 1/3. Cliff dies. His 1/3 would be distributed according to his estate planning – meaning if his Will left everything to his spouse, Bob, Tom, and Cliff’s wife are about to become owners together. Maybe okay, maybe awkward, who knows!
The kicker is that if the Deed is silent – it defaults to Tenants in Common, which is kind of odd, right?! So say someone pulls a Deed off the internet and just puts a property in their name and another person’s name (not their spouse) …. And does not put any classification (i.e. Joint Tenants with Rights of Survivorship) behind it, the law presumes it’s Tenants in Common.
That is exactly what happened to this client, Beatrice. So back to Beatrice we go…
Beatrice transferred her house to her three children and didn’t put any classification as to how she was transferring to them – so it defaulted to Tenants in Common. So as I stated before, one of her children ends up passing after she transferred her house. Guess what had to happen? I’m afraid to tell you…!
Well, that child, legally speaking, owned a 1/3 interest in Beatrice’s house – because the child passed away, we had to PROBATE the 1/3 interest to get it “back” to Beatrice and her two living children. The deceased child was married, had children, etc. so because his 1/3 interest had to go according to his estate plan – which left everything to the spouse – thankfully, the spouse of the deceased child agreed to “waive” her interest and let is pass “back” to Beatrice and her two living children. (Please note, she didn’t have to! She could have caused a scene!)
However, where the story stinks, is that for probating the deceased child’s estate (for the 1/3 interest), they had to hire an attorney, like us…well they did hire us, to get it straightened out.
When I gathered all the facts, and especially when I learned the reason WHY Beatrice transferred her house to her kids, my heart sank. The reason? In case you didn’t know, there are ways to protect your house and assets against the nursing home – by NOT transferring your assets to your kids/beneficiaries. That may be a conversation and episode for another day!
I won’t bore you, today at least, on ALL the details “how” to accomplish this – to protect your assets and house without transferring to your kids – but how it works is utilizing a specific type of Trust … which allows you to 1) gain protection AND 2) maintain control of your own assets. Beatrice COULD have done this…
Not to mention, even if that isn’t enough to convince you that Beatrice doing this wasn’t the greatest idea, let me also share a little bit about why this was a bad move tax-wise, too. Had Beatrice waited to transfer her house at her death – whether by Trust or just her personally – her kids would have gotten a step up in basis. What does this mean? Let’s talk through a quick scenario…
Say Beatrice bought her house many years ago for $70,000. Today, in 2021, it’s worth $130,000. At Beatrice’s passing, the kids would inherit the basis of $130,000 – and NOT have to pay capital gains on the difference between $70,000 and $130,000 when the house got sold. Since Beatrice transferred her house prior to death, the kids do NOT get the step up in basis to $130,000. So, in super short conclusion, it hurt them tax-wise too. Ouch! Knock ‘em while they’re down…
I often think about these “type” of cases and stories – I’ll wonder, “WHY did they not seek professional legal advice?” Sometimes, I have to assume that people don’t obtain legal advice because the cost. They’re afraid it’s going to cost them an arm and a leg. Because yes, legal services aren’t usually free. Though, I instantly think of the Beatrice examples – that, Beatrice (and her family) would have come out so much more ahead, financially speaking AND heck even mentally speaking, had they gotten advice.
Anyway, next time you consider doing some D.I.Y. estate planning – maybe consider getting an attorney involved. It’ll not only give you immense peace of mind, but it just may save you/your family a buck or two (even if it doesn’t feel like it in the moment).
Next week’s topic is a current event/current trend -- something I’ve seen or run across that I think would be interesting on here. Next week, we’re going to be talking about something unique – that’s what is fun about this “current trends” category … something going on in today’s age, and relating it to my little estate and elder law world!
Anyway, next week we are going to be talking about how the NCAA is going to allow college athletes to make money off their *quote* name, image, and likeness.” So what’s that mean? Well, these young athletes are going to make money – and often young ‘ens don’t even consider estate planning. It’s only a matter of time before a college athlete makes a good chunk of change, and something happens to said athlete … without any sort of estate plan.
Until next time, Legal Tea Listeners…talk soon!
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