I’m a Financial Planner: Here Are 5 Mistakes You Must Avoid When Transferring Property to Heirs
Death is inevitable, but dying without an estate plan is not. Estate planning is a must for property owners, no matter how uncomfortable the subject might make you. The good news is that it’s not hard to ensure the smooth transfer of ownership to your spouse, children or other heirs — as long as you know which mistakes to avoid.
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Here’s what not to do when planning to transfer property after you’re gone.
Don’t Make Assumptions About Your State’s Next-of-Kin Laws
If you die without a will, your state’s intestate succession, or next-of-kin laws, will determine who gets your house if yours was the only name on the deed. It varies by state, but generally, the order of priority goes as follows:
Spouse
Biological and adopted children
Parents
Siblings
Grandparents, aunts, uncles, nieces, nephews, cousins and other extended family
It’s important to know the details of how your state treats intestate property distribution to avoid surprises. For example, some states prioritize full siblings over half-siblings while others treat them equally.
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Don’t Die Without a Will and an Updated Deed in Place
Hoping that your state’s intestate laws match your wishes for who gets your house is not a real plan — but it’s an all-too-frequent outcome.
“The most important and common mistake I see clients make is not leaving a clear directive for who should get their house when they pass away,” said Jay Garvens, an expert in real estate law and Colorado Springs-based business development manager for Churchill Mortgage.
But some states still require the property to go through probate if the surviving heir is not in co-ownership of the house, even if you have it clearly stated in your will, according to Garvens.
“The simplest and most direct way to protect your real estate property before you pass away is to add one of your adult children — or the person you intend to be the executor of your estate — to the deed of the property via a warranty deed or quit claim deed,” Garvens said. “This ensures your house will not go into probate and can seamlessly transfer to the individual you want to handle your estate upon passing away.”
Garvens recommends doing this once one spouse in a joint-owning couple dies.
“This ensures a smooth transition plan once you pass away, as the last thing you want to do is create headaches for family members left to settle estate issues,” he said.
Don’t Assume All Ownership Transfers Are Treated Equally
According to Trust & Will, there are four general types of property ownership and the legal system treats them all differently.
Property with right of survivorship
Property held in a trust
Property subject to a will
Property for which the spouse does not have a will
If two spouses purchase and jointly own a property, then the right of survivorship dictates that the surviving spouse automatically receives the deceased’s half and becomes the sole owner. This is the simplest and easiest outcome, as it avoids probate and there is no need to change the deed, but that’s not always the case.
“While under many circumstances property ownership transfers automatically to the surviving spouse, there may be some instances where the surviving spouse must do something to ‘perfect’ their ownership,” said published author and estate planning attorney Travis Christiansen of Boyack Christiansen Legal Solutions.
Christiansen explained that “perfect” is a legal term indicating that ownership is legal and would be difficult to change even if disputed.
“A surviving spouse may have to change their deed after a partner dies if they had a deed that didn’t have an automatic transfer of property after death,” he said. “If only one spouse was on the deed, they may have to go through the probate process — assuming there was a will — to transfer the home into the surviving spouse’s name. A spouse will often have to file a survivorship affidavit along with a copy of the death certificate to perfect title in only their name.”
Don’t Transfer Property While You’re Still Alive
Clients frequently ask Tim Sechler, certified elder law attorney of the Sechler Law Firm, if they should transfer ownership to their heirs while still alive. The answer is usually “no.”
“There are three reasons clients seem to want to do this,” Sechler said. “First, a lifetime transfer will avoid the probate courts when the parents pass away. Second, clients seem to think there is a tax benefit to the transfer. Finally, clients think that this will protect the value of the home from a nursing home.”
Sechler explained that while a lifetime transfer does avoid probate, it presents other challenges.
“By transferring the primary residence to a child, a client is likely making a capital gains tax mistake,” he said. “The sale of someone’s primary residence is largely exempt from capital gains taxation.”
However, if the house is transferred to the child and they sell it not as their primary residence, that’s a different story.
“This can result in unnecessary taxation,” Sechler said. “If, alternatively, the child inherits the property at the time of his parents’ death, the child will enjoy stepped-up tax basis and avoid capital gains taxation.”
Don’t Assume Your Heirs Share Your Wishes — Or Can Share a House
Before you do anything, make sure the person or people you’re bequeathing the house want to inherit it and all the responsibility it brings — particularly if there’s more than one heir with a history of friction.
“One of the biggest mistakes when transferring property to heirs is not considering the practical impact of splitting a property among multiple heirs,” said David Goldstein, partner at the Farrell Fritz, P.C. law firm in New York. “For example, if your children do not get along or are in different financial positions, leaving a particular property for them to manage jointly could exacerbate these differences. Another mistake is not communicating with your heirs about your plans prior to death. This is especially true if leaving a particular property in unequal shares among your heirs — or all to a single heir — as this can lead to feelings of resentment, and, in the worst-case scenario, costly litigation.”
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