Estate Planning Attorney Advises Against Shortcuts

The estate planning attorney is familiar with this gentleman’s plan to avoid the “courtroom mumbo jumbo” described in the article “Estate planning workaround idea needs work” from My San Antonio. It’s not the first time someone thought they could make a shortcut work by avoiding the visit to their local estate planning lawyer, and it won’t be the last. The article describes how the problems this rancher will create for himself, his wife, and his children, will easily eclipse any savings in time or legal fees he thinks he may have avoided.


Let’s start with the idea of putting all the man’s assets in his wife’s name. For starters, that means she has complete control and access to all the accounts. Even if the accounts began as community property, once they are in her name only, she is the sole manager of these accounts.


If the husband dies first, she will not have to go into probate court. That is true. However, if she dies first, the husband will need to go to probate court to access and claim the accounts. Same goes with incapacity, if the wife becomes mentally or physically incapacitated, husband will have to go to court to access that money (unless a durable power of attorney is in place that covers bank transactions). If the rancher had worked with an estate planning attorney, a better solution would have been to use a joint living trust where both spouses have access to the property throughout their lifetimes, with provisions for what happens in the event of death of either spouse, all handled privately and avoiding probate court.


Another proposal was to put the ranch into the adult children’s names. Making lifetime gifts to children has a number of irreversible consequences that apply when real estate is put into children’s names during the owner’s lifetime.


First, the children will all be co-owners. What if they don’t agree on something? How will they break an impasse? Will they run the ranch by majority rule? What if they don’t want to honor any of the parent’s requests or ideas for running the ranch?  In addition, if one of them dies, their spouse or children may inherit their share of the farm. If they divorce, their future ex-spouse may retain ownership of their shares of the ranch in some cases. It is often not until someone sits down with an estate planning attorney that they learn about these practical risks.


Then, there is the loss of control that comes along with making a gift during lifetime. You can’t gift property and still be the owner (unless you only gift a partial interest, but even then you still run into the same problems of co-ownership listed above). If the parents they don’t agree with the children’s plans for the property, they are in a tough position as a result of making that gift.


Third, because the transfer of the ranch to the children is a gift, there will be a federal gift tax return form to be filed if the gift is in excess of the annual gift tax exclusion (currently $15,000 per donor). Perhaps worse, because the children have become owners of the ranch by virtue of a gift, they miss out on the tax-saving “step-up in basis” that is available when property is inherited after a death, a highly valuable tool that an estate planning lawyer will be able to maximize for his or her client. Loss of the step-up in basis means that, if property is later sold by a spouse or children, they will get hit with capital gains taxes that could have been avoided. Those taxes are just one very real example of a price of taking shortcuts that will cost a lot more than what it would cost to implement a sound estate plan with an estate planning attorney.


Finally, we haven’t even mentioned the family business succession plan for our rancher, which complements the foundational estate plan. Both plans exist to protect the current owners and their heirs. If the goal is to keep a business in the family and have the next generation take the reins, everyone concerned be better served by sitting down with an estate planning attorney and discussing the many different ways to make this happen.


Reference: My San Antonio (April 29, 2019) “Estate planning workaround idea needs work”


#FederalGiftTaxReturn #FamilyBusiness #CapitalGainsTaxes #Heirs #JointOwnership #EstatePlanningAttorney #EstatePlanning #StepUpInBasis

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