In this world of DIY (do it yourself) for the purpose of saving a buck to lose ten dollars, some people are taking estate planning into their own hands. After all, its just some form with some blanks to fill in – right? There could be nothing further from the truth. Here is one example of what can happen.
Mom and daughter in their ultimate wisdom decide to transfer mom’s house to daughter. Why they believed they needed to do this is unknown but it probably had something to do with avoiding probate at mom’s death. Daughter prepares a quit claim deed she found on line and mom signs it. Effectively daughter now owns mom’s house. However, they did not record the deed. They may have believed by not recording the deed the transfer wasn’t actually complete. In Florida, the act of delivering the deed to the grantee completes the transaction. So, we have a completed gift from mom to daughter. In all likelihood the value of the home exceeded the annual gift exclusion (currently $13,000). Further, it is unlikely mom reported this gift to the Internal Revenue Service. Lastly, if mom was headed to a nursing home, this gift could cause her a period of ineligibility.
Yet, there are more potential problems. Four years later, mom died. Daughter records the deed showing the property transfer is complete. Yippee, she appears to have avoided the dreaded probate. Instead, she gets s call from the property tax assessor. Since mom hasn’t owned the property for the last four years, she was not entitled to her ad valorem homestead exemption for property taxes. The daughter now owes $20,000 in back taxes! If daughter sells the property to pay the taxes she may also have an obligation for capital gains taxes. When mom gifted the property to daughter she transferred her original basis (what she paid for the home) to daughter. If daughter sells the property, her capital gains tax will be based on the difference of the fair market value when she sells it less mom’s original basis. This could cost her thousands in unexpected taxes. If daughter had waited to receive the property until mom’s death she would have received the property with a “stepped-up” tax basis and avoided the capital gains tax issue.
Further, it was mom’s intention that at her death the daughter share the property with her five siblings – will she comply with this request? What about the gift tax consequences she may experience? Will the siblings pitch in for the back taxes? If daughter has a judgment or other creditor she may also run the risk of losing the property to the creditor.
Today, daughter is faced with more problems related to the property than she could have imagined. She has employed the services of a lawyer and so have some of her siblings. The costs related to this one “simple” transaction continue to rise.
The potential to create significant problems from just one misguided decision is huge. Always consult with a qualified legal professional – someone board certified in wills, trusts and estates or elder law before taking legal matters into your own hands.