Beware the Oft Spoken Line to Seniors: “Transfer Ownership of Your House to Your Kids!”

Should parents transfer their home into their adult children’s names, deeding the house to their kids? This is one of the most common questions that comes up when discussing estate planning with families.

In fact, oftentimes families assume that this preferred and correct handling based on the “advice” you or your adult kids have received from well-meaning friends and family—even the internet. The intention of a transfer is always the same. You and your family want to preserve your family home from a required spend down of your assets should you need extensive medical care in a nursing home or acute care facility.

The fact is, no two families are alike. Don’t sign a deed transferring your house to your kids without taking these important first steps: Have conversations about appropriately protecting your assets with your family and then post haste make an appointment with your estate attorney. Recognizing the potential risks of arbitrarily transferring ownership of your home to your kids will give you a clearer picture of why a willy-nilly transfer is a really bad idea.

Timing is Everything

It may be too late to consider a transfer if a diagnosis of an illness or condition has just been made. Medicaid looks back five years for major financial transactions. If the goal is to reduce your assets so you can qualify for Medicaid, remember that Medicaid will review financial transactions over the last five years. The transfer of a home within this 5-year window constitutes a red flag and may disqualify you from Medicaid nursing home coverage unless there are sufficient other assets to cover the costs during the 5-year period.

Emotional Decision-Making Won’t Do

Having your adult children help you with your financial needs late in life can be challenging. Your emotions do not always help you make the best decisions. A desire to keep the long-time family home in the family or, perhaps less charitably a sense of entitlement on the part of some or all of your children who believe that it should be the family legacy, do not typically lead to sound actions. There are many laws and rules to navigate, and time may not be on your side. Plus, the decision cannot be one-sided. If you are capable of sound decision-making, your wishes combined with the guidance of your estate attorney, financial advisor, or CPA must agree on the best course of action for you and your family.  Allowing your kids to be privy to these conversations and have a voice is also a good strategy for family harmony.

Uncle Sam Comes Calling

Transferring your principal residence to a family member may disqualify you from part or all of the capital gains tax exclusion on the sale of the residence and cause unnecessary income tax liability when the residence is sold in the future. Consider the hefty tax bill for either a parent or their children from a capital gains tax on any gain (e.g., profit) on the house sale if you lose the exclusion and your family decides to sell the house during your lifetime.

Is a Life Estate Deed the Answer?

Individuals often think they achieve the best of all worlds if they establish a transfer of real property through a life estate deed. A life estate deed permits a property owner to have full use and occupancy of their property until their death, at which time your home will be transferred to your children. Because life happens, there are any number of potential pitfalls:

Appropriate Transfer of Home. Get Guidance First.

Indeed, there are situations in which a transfer will work. For example, Medicaid sometimes recognizes a caregiver child exception that allows you to transfer ownership of your house, provided the adult child has lived in your home for at least two years and provided a level of care that prevented you from required nursing home care. That said, the transfer of the home through a life estate deed would cancel the caregiver exception.

A Trust is another—if not the best way—to transfer home ownership from you to your children. When the house is transferred to the Trust, you establish directions for the administration of the Trust and appoint a Trustee who is required to protect your interests.

Still in either of these situations, the counsel of your estate attorney in collaboration with your financial advisor, and CPA are the professionals best equipped to assist you with these specific situations.

At Phelan, Frantz, Ohlig, & Wegbreit, LLC, we are available to answer your questions, inform you of your options, and guide you in both your decision-making and the transfer implementation if all parties determine that a transfer is in your best interests.

Call us at 908- 232-2244 and enjoy the peace of mind of knowing that you are backed by support and knowledge in making informed decisions.

How Much Can You Control Your Kids’ Lives from the Grave?

You want the best for your children, and you want them to inherit your assets when you die. But what happens when you don’t like your son- or-daughter-in-law? How can you prevent your kids’ inheritance money from being commingled with the couple’s marital assets? Can you still exert control from the grave?  Should you?

In short, you can, by establishing a trust that prevents assets from passing directly to your child, which prevents the commingling of assets. And in the event one of your kids gets divorced, this trust may preserve these assets from being considered available for alimony obligations. Such a trust is designed to keep money in the family, protecting the inheritance of your children and their descendants. Specifically, assets in the trust can only be used for your children’s or grandchildren’s health, education, maintenance, or support.

Evaluate Your Motives

You may actually be surprised at the number of people who sit in our conference room and want to block their in-laws from touching the family inheritance. The first thing we do is encourage them to evaluate their motives. Is your distrust of a son-or-daughter-in-law based on your knowledge that your son or daughter’s spouse is a spendthrift, gambles, has difficulty holding a job, or treats your child and their children abusively, or similar scenarios? In this case, a trust like this can work to safeguard your assets for your children.

But if your motives are based solely on your dislike, or a fear that your kids’ marriages will end in divorce like 50 percent of all marriages in the U.S. do, you may want to think twice. The logistics governing the administration of the trust can get thorny. For starters, best practice encourages appointing an independent Trustee to administer this trust. The result is that your children’s withdrawal rights may also be limited.

In the Name of Love

If there’s income your kids are entitled to get every year or a draw on principal, the trust requires that they must ask the Trustee’s permission for the money to be distributed. Bottom line, while you’ve created a buffer that prevents your in-law from getting to the money, you’re also making it difficult for your son or daughter to access their inheritance. Even though you’re doing this in the name of love, your kids have to penetrate this barrier you created by going to the Trustee to get monies.

And aside from the inconvenience, what does that mean for your kids? How are they going to feel about that? How will they ultimately feel about you? You may not like your son or daughter in law, but your son or daughter may adore them. And despite what you think, they might have a very good marriage. Your feelings could actually throw a monkey wrench or certainly elements of mistrust into a good marriage. Additionally, even if your kids have to ask permission to get the money, distributions made by the Trustee may well be commingled anyway. So, you can never fully control the way your inheritance money is used. You can only make it harder.

Discuss Inheritance Decisions With Your Attorney

At the end of the day, you may not be the best one to decide whether or not inheritance money should be commingled with your kids’ marital moneys. Every situation is different. When you work with one of our attorneys at Phelan, Frantz, Ohlig, and Wegbreit, LLC, you can rest assured we will make sure you evaluate all the ramifications of your decision-making before you finalize your estate plan. We will also make sure you review your plan every 5 years or so, to make sure that it’s consistent with your perspective and the inevitable changes in your family situation.

Calls us at 908-232-2244 to ensure that the decisions you make today will work well for your loved ones tomorrow.

What to Do With Your Cherished Home When You Die: It’s Not as Easy as You Think

The reality is that leaving your house to your kids when you die is not always what your heirs want you to do with it. Trust us. All you have to do is ask your kids.

If you’re like most clients, you come to our firm to talk estate planning, and your focus is typically your Will or Trust, your retirement plan beneficiaries, and the tax strategies that will allow your kids to get the most out of their inheritance. All too often a discussion about what will happen to your house—even your vacation house at the Jersey shore—gets left by the wayside. There’s a good chance your emotions run deep and that you have an intense attachment to your family home. Your assumption, therefore, is that your kids have the same connection to the house that you do.

Please think again. The two operative words here are emotions and assumption. Your home surely holds wonderful, rich memories. It is likely also your single largest holding and in today’s housing market, that may very well constitute a good amount of money and a substantial investment. Word to the wise. Emotion doesn’t work with decisions that are innately investments.

As for your assumptions…you’re first assumption is that everyone gets along. But if your kids argue now about who ate the frosted flakes, how are they going to get along when the stakes are higher? Suddenly they’ll be faced with decisions about upkeep and maintenance or renting the shore house. Decisions like that can fracture families.

As importantly, your assumptions don’t take into account the natural progression of family events. You’ve cut the apron strings and enabled your kids to chart their own course and flourish. A house may be an encumbrance that undercuts your children’s vision of their future. Keeping the family home, then, may end up being a curse rather than a blessing.

Examine your feelings

There’s no question that the emotional attachment you have to your house is understandable. You’ve created memories there. Your vision is to make it part of your legacy. You want your kids to have the opportunity to live there…to have their kids go to their school. Or, if it’s your shore house, you want them to enjoy memorable summer days together and then pass the house on to your grands, so that it will stay in the family forever.

As warming as that idea is, it has the potential of becoming an at all costs proposition: It doesn’t really account for life changes that your children or grandchildren may have one day. What if work takes them all over the country even around the globe? Plus, as they create their own families, the circle widens. It can even and likely will include in-laws. Before you know it, you have 15 people who can’t get along managing a house together. There are added risks such as divorce or, even worse, death. In in lieu of family harmony you may end up with in-fighting and discord.

It’s important to understand that emotion and assumption can take you down a rocky road when you’re making decisions today that will impact your children long-term. Even though it may be difficult, try to step out of the emotion and think more pragmatically. Discuss the idea of leaving a house to your kids with your estate planning attorney. She can illustrate some worst-case scenarios that, guaranteed, are far different than the vision of the ongoing family unity you see in your mind’s eye. You may not want to hear what your attorney has to say, but the dose of reality can help you give up emotion for more pragmatic thinking.

Have those important family conversations

Estate planning isn’t, after all, one sided. This is especially true when leaving a house to your kids and all the responsibility that comes with it. Just as you discuss financial matters such as who in the family will be your Power of Attorney or Healthcare Proxy, have a frank discussion about whether they can envision themselves living or vacationing in that house. Make them understand that you want and need them to be forthright. Steel yourself against potential disappointment and be willing to let go of the motivation to have them inherit the house. Without some outside-the-box thinking on your part, it could end up as an inheritance at any and all costs. Their honesty now about the vision they have for their lives going forward may initially sting, but it’s a good preventive for problems in the future.

Create happiness. Prevent messes

Sometimes we are unable to convince clients that leaving a house to their kids may not be prudent. In these instances, creating a Will or Trust that provides a degree of flexibility for a potential sale or buyout is a viable second option. On the one hand, the parent’s hopes and intentions are honored. On the other, their kids, grandkids, even nieces or nephews who may be beneficiaries can take comfort in knowing they have an out—have the ability to make decisions that will work for them—if sharing the family home or even managing it alone does not come together smoothly.

Flexible documents include language that delineates how to get somebody out of the property if the situation doesn’t work and how to unwind the inheritance by selling the property. The language of these documents:

A dollar versus fair market value

So, is the buyout for a dollar or is it to real market value? That’s a question that can and does come up. The answer to that question is unequivocally always fair market value. Anything different or less, and it’s a gift that could subsequently interfere with their estate planning and how they distribute their assets to their loved ones. It comes down to the fact is that if they have an ownership interest in the house anything drastically short of fair market value is gifting. That’s a massive issue, especially right now with the proposals in Congress that could significantly bring about estate tax reform.

One last salve

There are plenty of situations in which the moment the Will is read, one of the kids says they clearly have no interest in the property. In this situation, as long as all the beneficiaries agree, the law will allow for there to be a distribution in lieu of the house. This means that the sibling who doesn’t want the property gets other assets from the estate and the other two siblings get the house. In other words, a clause can be written into the document that gives flexibility to the final distribution. And again, that distribution must be made in alignment with fair market value of the property at the time of distribution.

Rational decisions are key at any juncture 

The image of your children having a “What was my dad thinking?!” reaction to your Will is far from pleasant. Being well-thought out from the get-go is one way to avoid it.

Discuss these matters with your family and your estate attorney as you develop your estate plan. Make certain reason trumps pure emotion. Work with your estate attorney to include flexible language. These actions are among the ways to steer clear of the mess of family discord.

At Phelan, Frantz, Ohlig, & Wegbreit, LLC, we know how much your loved ones matter to you. They matter to us, too.

Call us at 908-232-2244 and cover all the bases to ensure your legacy will bond your family, not divide it.

USING A REVOCABLE TRUST TO PASS ON REAL ESTATE TO YOUR CHILDREN

Act Now to Prevent the Future Hassles of Out-of-State Probate

The concern is a common one: “I want to make it simple for my kids,” say aging parents of adult children. “I don’t want them to experience stress when the time comes to settle my estate.”

Estate attorneys have solutions to honor these wishes. These solutions are, in fact, quite simple to execute, provided they’re completed as part of your estate planning. Failing to attend to these matters during your lifetime may mean you are bequeathing not only an inheritance to your children, but also a probate nightmare, particularly if you own property in more than one state.

Jumping Through the Hoops of Probate in Several States

Many of our clients have a primary residence in New Jersey and own vacation homes or rental properties in other states such as Pennsylvania, Florida, or New York. If the goal is to pass these properties on to future generations in the simplest way possible, the focus should be on ways to avoid probate in more than one state.

States are possessive of real property located within their borders. Accordingly, the appointment of an executor in New Jersey is of little consequence outside of New Jersey. When it comes to the transfer of real property inside their state, individual states reserve the right to make their own determination as to who should be appointed pursuant to their state’s unique rules. And while New Jersey has a relatively straightforward probate process, other states do not. Going through probate in states like Florida and New York, for example, takes considerable time and money. Thus, effective estate planning that for individuals who own multiple properties often requires the implementation of a plan that helps families avoid having to institute probate actions in multiple states.

Transferring Property Into a Revocable Trust: Smart Estate Planning and Flexibility

There are various estate planning tools that can provide you with peace of mind knowing that your assets will be transferred seamlessly to your heirs. One such tool, a revocable trust, also known as a living trust, has multiple features that can benefit you during your lifetime and your heirs when it comes time to settle your estate. A revocable trust provides a prearranged mechanism that will ensure the continued management and preservation of your assets, should you become disabled. It can also set forth all of the dispositive provisions of your estate plan and detail how you want your assets to be disbursed. In addition, a trust protects your privacy and the privacy of your beneficiaries because unlike a Last Will and Testament, which is a publicly available document once probated, a trust is available only to the impacted beneficiaries.

Finally, transferring your various properties into a revocable trust will help your family avoid the nightmare of multiple probate actions and the corresponding costs of different lawyers in different states. Because you are the trustee of your living trust, you still have full authority with respect to how the property is used and managed during your lifetime and all income tax consequences are reported on your personal income tax return.

The creators or “grantors” of the trust, which can be either a single individual or a couple, can establish the terms that will dictate what happens to assets held in trust upon their death. To this end, successor trustees also are named by the trust, which ensures that the grantors’ designated agents have automatic authority to sell, transfer, and manage the property upon the grantors’ death without the need to seek court appointment. In short, when properties are owned or held by the trust, there is no need to probate a Will, whether the property is held in New Jersey or another state.

Further, revocable trusts offer a degree of flexibility. For instance, if you become incapacitated or ill during your lifetime, the successor trustee can step up to assist and run things, offering a seamless transition. In addition, other assets, such as bank or brokerage accounts, can be retitled into the trust. Many financial institutions prefer to manage assets held in this manner as it allows them to respond quicker in emergent situations and serve clients more nimbly than they would be able to if they had to wait for the production of a power of attorney or a court appointed guardian to provide instructions.

Additional Considerations for Rental Properties: Limited Liability Companies

We frequently counsel clients who have rental properties to place such property into a limited liability company (LLC). Property ownership, especially ownership of rental property, comes with the risk of liability from injuries that take place while on the property, leaving you and your assets vulnerable to claims and/or exposing you and your assets to the risk of lawsuits. If your property is held in an LLC, and it is the only asset in the LLC, your liability is limited to that property, and your other assets are shielded from judgment if the formality of the LLC is honored and assets are kept separate.

Holding properties in trust and an LLC are not mutually exclusive planning techniques. Instead, the property can be placed in an LLC for liability reasons and the revocable trust established for estate planning purposes can serve as the sole member of the LLC. In other words, the trustees hold the LLC and the LLC holds the property. Although the structure is akin to the Russian stacking dolls, it makes sense for a multitude of reasons.

In either case, the trust assets, in this case the property, can easily pass on to your heirs. The trust itself may also continue with the trust assets managed and payments continued to the trust’s beneficiaries. What’s more, if your heirs decide to sell the property, they can do so easily and earn and retain money for that sale.

Life Happens: Realtime Action to Prevent Future Hassles

It’s important to remember that taking action now will prevent issues from complicating your children’s lives in the future. At Phelan, Frantz, Ohlig & Wegbreit, we are here to help you pass your property on to your beneficiaries easily and cost-effectively.

Call us at  (908) 232-2244 to develop an estate plan that will give you the peace of mind you need today, knowing your heirs will be well-protected tomorrow.

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