As I have discussed in the many other articles, many people have been told they should avoid probate. Usually, they are told they need to avoid probate because of its cost. (Interestingly, most people have no idea what probate actually costs or what it should cost.) Nevertheless, it is not uncommon for me to see “shortcuts” people take to avoid probate but still try to pass on assets to their children.
There may be good reasons to use a method other than probate to transfer assets at your passing (something I will discuss in a future column). However, it is still critical to pass on those assets in the proper way. The shortcuts I often see are risky, and ironically, sometimes more costly.
For example, some parents sign the deed for their home over to one of the children while the parents are still alive. When the parents die, that child can sell the home and split the money among all of the kids. They avoided the cost of probate!
But they likely did not avoid the cost; they delayed it. And when it comes time to pay, the cost may be much higher.
That cost will be due when the home is sold. At that time, the homeowner (now, the child) will be responsible to pay taxes on the profit from that sale. What is the “profit”? It is the increase in the value of the home from the time the parents bought the home to the time it was sold. If the home was purchased for $50,000, and decades later is sold for $150,000, that child would end up paying taxes on $100,000!
However, had the parents passed on the home through probate, it is likely no taxes would be due. The “short cut” to avoid probate will end up costing the family many thousands more than if the parents had simply passed on the home through probate.
The financial cost is only one of the risks this family faces. Next column I will discuss some of the other costs that can occur when families take shortcuts.