Most people want to avoid probate, the court process of wrapping up a person’s affairs after death. Unfortunately, many Utahns make costly mistakes by do-it-yourself probate avoidance. Don’t make these mistakes:
Bad way # 1: Put your kids on the deed. Marie’s heard she could avoid probate by putting her four children on the deed to her home. The deed cost her a fortune.
Five years later, Marie’s daughter Terry filed bankruptcy after an accident. Her creditors discovered Marie’s deed and the court ordered a sale of Marie’s home to pay Terry’s debts. To save the home, Marie’s other children jointly signed a new mortgage to pay Terry’s creditors. The IRS discovered the deed and mortgage and denied Marie the tax deductions for the mortgage interest. The IRS also required a gift tax return for the value of the house. When she sold the house to pay the mortgage, Marie lost the once-in-a-lifetime tax exemption
for most of the house. She and her children paid over $30,000 in capital gains tax caused by the deed.
Bad way # 2: Sign an unrecorded deed for your property. Some Utahns think they can avoid the problems above by signing a deed but not recording it in the county records. This is risky. A deed which is recorded years after its signing can cause title problems. Living in a property for years after you deed it to another can suggest the deed is invalid, and may open the deed to an attack by creditors or other heirs. If the deed is accepted, large taxes may result from a transfer on the signature date.
Sometimes, the deeds are not found or are discarded by heirs who do not like the result. In other cases, they are forgotten and contradict estate plans created after the deed.
Bad way # 3: Give away your property just before death. Death bed transfers of property are common. Two weeks before his death, Robert signed deeds transferring his rental property and farm land to his children. He died not knowing his deeds had cost his family more than $100,000 in capital gains taxes on all of Robert’s gain on the property. If Robert had let the property pass through his will or trust – just two weeks later – his heirs would have had no tax.
Bad way # 4. Make one of your heirs the co-owner of your bank or brokerage account. Thousands of Utahns have done this without realizing the heir will be treated as the sole legal owner of the account after the original owner dies. This creates the risks and problems described above. Don’t do it.
If you want to avoid probate, create a living trust which satisfies Utah law. (More more information, see: How to avoid probate in Utah.)
Published October 1, 2009, © 2009 UtahElderLaw.com