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One inheritance planning mistake to avoid in 2014
Jan 15, 2014 | 1305 views | 0 0 comments | 4 4 recommendations | email to a friend | print

By Robyn Rowe Walton

Attorney at Law

Many of us believe that our Last Will & Testament or “Verbal Instructions” to our family controls what happens to our “stuff” (property and assets) when we die.  Unfortunately, when it comes to real estate what your deed says is what matters.  Most people believe they don’t have a deed until their home is paid off, but the truth is that you likely received a deed after purchasing your home.  Now is a great time to get your deed out and find out if you have made this mistake:

When you add another person to your deed they legally become a co-owner under Utah law, meaning that you have effectively “gifted” that person a portion of that asset. Such a transfer often violates terms of your mortgage or can prevent you from being able to obtain a reverse mortgage later in life (if the person is not over 65 or does not live with you).

If you put one of your adult kids on your deed and they later have a legal problem such as credit card debt, bankruptcy, tax lien, divorce, business debts or an accident not covered completely by insurance, the “share” of the property that you gifted to your child can be at risk for foreclosure by the child’s creditor.

The more serious problem is that when you die the person you have named on your deed will receive the entire property if you have named them as a joint tenant.  A joint tenant typically has no legal obligation to share jointly held property with the family of a deceased tenant and the will of the deceased owner often has no effect.  This disparity between the will and the deed often creates contention and difficulties of “sharing” and fairness with many families. 

Another costly problem of adding a child to your deed is capital gains taxes due to appreciation. If your property is sold after your death, the co-owner will likely have to pay substantial capital gains taxes to the IRS if your property has increased in value since purchase.  Capital gains tax can amount to 22 percent or more (considering federal and state income tax rates) of the appreciation in your home when it is sold if the co-owner is not eligible for the residential capital gains tax exclusion.

SOLUTION:  IRS Code Section 1014 allows your home to receive a new tax basis equal to the fair market value of the property at your death.  Therefore, if you own your home at death and your home is sold for the date of death value there is no capital gains tax to your loved ones.  To obtain this “step up basis” you must leave your home through a trust that you own or through your estate.   If you pass your home through your will or intestacy (no will) your family will incur probate costs (on average $2,000 minimum).  However, if you place your home in a simple trust that you own until death, that then distributes at your death to your children, your children may take advantage of the “step up basis” and sell your home “tax free” and without probate costs when you are gone.

A trust allows you to control the property without worrying about your loved ones’ legal problems touching you and can prevent the cost of probate and capital gains taxes when you are gone.  Setting up a simple trust should typically cost much less than even the minimum average cost of probate.  The correct kind of trust does not offend the “due on sale” clause of your mortgage and if properly drafted qualifies for most reverse mortgage products.  More importantly, when you die your named administrator (trustee) with a properly drafted and funded trust merely needs your death certificate and the trust to take title to  your property and need not pay costly probate or legal fees to obtain title.



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