Using a Do-It-Yourself Estate Plan can cause more problems than it solves.
The estate planning attorney in this gentleman’s neighborhood isn’t worried about this rancher’s plan to avoid probate (or the “courtroom mumbo jumbo”).
It’s not the first time someone thought they could make a shortcut work, and it won’t be the last. However, as described in the article “Estate planning workaround idea needs work” from My San Antonio, the problems this rancher will create for himself, his wife, and his children, will easily eclipse any savings in time or 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 marital 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. If the marriage goes sour, it’s not likely that she’ll be in a big hurry to return access to everything.
Another do-it-yourself solution: set the accounts up as joint accounts with rights of survivorship. The bank would have to specify that when one spouse dies, the other spouse owns the accounts. However, that’s just one facet of this estate planning hack.
The next proposal is to put the ranch into the adult children’s names. Gifting the ranch to children has a number of irreversible consequences.
First, the children will all be co-owners. Each one of them will have full legal control. 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 their child will inherit their share of the farm. If they divorce, will their future ex-spouse retain ownership of their shares of the ranch?
Second, you can’t gift the ranch and still be an owner. The husband and wife will no longer own the ranch. If they don’t agree with the kid’s plans for the ranch, they can be evicted. After all, the parents gave them the ranch.
Third, the do-it-yourself transfer of the ranch to the children is a gift. There will be a federal gift tax return form to be filed. Depending on the value of the ranch, the parents may have to pay gift tax to the IRS. Because the children have become owners of the ranch by virtue of a gift, they receive the tax-saving “free step-up in basis.” However, if they sell the ranch (and they have that right), they will get hit with capital gains taxes that will cost a lot more than the cost of an estate plan with an estate planning attorney and the “courtroom mumbo jumbo.”
Finally, the ranch is not the children’s homestead. If it has been gifted to them, it’s not the parents’ homestead either. Therefore, they can expect an increase in local property taxes. Those taxes will also be due every year for the rest of the parents’ life and, again, will cost more over time than the cost of creating a proper estate plan. Since the ranch is not a homestead, it is subject to a creditor’s claim, if any of the new owners—the children—have a financial problem.
We haven’t even mentioned estate planning for a family business succession plan, which takes a while to create and complements the estate plan. Both plans exist to protect the current owners and their heirs. If the goal is to keep the ranch in the family and have the next generation take the reins, everyone concerned would be better served by sitting down with an estate planning attorney and discussing the many different ways to make this happen. This would not be an arena for Do-It-Yourself Estate Planning.
Reference: My San Antonio (April 29, 2019) “Estate planning workaround idea needs work”