Deeding The Home To Your Kids While You're Still Alive? Could Be Trouble Ahead!

Perhaps you're thinking ahead and you want your kids to have the house some day. You might think that deeding your home to them now (inter vivos gift) will provide some certainty for their future and give them some skin in the game. Maybe you want to do this to avoid probate.

Whether you add the children as additional joint owners with yourself, or you convey it entirely to them by quitclaim deed, there is the potential for conflict, as well as legal and tax issues. There are several reasons why deeding to your children now may not be a good idea.

Multiple joint owners can mean multiple conflicts. One of them wants to sell their interest? Under joint tenancy, the other joint owners (and their spouses) will need to agree to it and sign the deed. But if the property is owned as tenants-in-common, any one owner can independently sell, mortgage, or give away their individual interest in the property. You could end up having a total stranger co-owning your property.

Higher taxes. When children inherit property, they inherit it at at the market value on the date of death--stepped-up basis. This minimizes the capital gains tax when the children sell the property shortly afterwards. But if the property had been gifted to the children while you're alive, for tax purposes the property is viewed as being owned by the children at that time. Thus, the taxes are based on the price you paid for it, which was probably much less than it's worth now. The children are liable for taxes based on the much greater difference in value, which could be a major financial burden for them.

Gift taxes come into play, as well. The current annual gift tax exclusion is $15,000 per child per parent. If you deed your home to your children--in part or in whole--you may be subject to gift tax liability for amounts above that exclusion.

Divorce--the fly in the ointment. If one of the joint owners is going through a divorce proceeding, the property will be considered a marital asset. Even if the divorce decree is from another state, the out-of-state ex-spouse will still need to sign off on the deed transferring the ex-spouse's interest in the property before the title is clear and the property can be transferred to a buyer.

Insurance issues. Property insurance will now include all joint owners on the policy. If someone sues one of the joint owners, the plaintiff would be able to pursue the assets of all of those joint owners if insurance doesn't cover all of the liability.

Judgments. If any of the joint owners has a judgment against them, such as for a personal injury lawsuit or a business deal gone south, the property could be targeted for satisfying the judgment.

Mortgage and expenses. If there is a mortgage on the property, will there be an arrangement in place for the joint owners to split those payments? What if one joint owner loses their job or just stops paying their share of costs? Don't forget apportioning property taxes, utilities, maintenance, etc. Will every joint owner pay their fair share?

Creditors. If one of the joint owners files for bankruptcy, the property could be considered an asset available to creditors and fair game for seizure or sale.

Medical Assistance claims. If you or your spouse need state Medical Assistance, there is a lien placed on the home. The surviving spouse gets to live in the home after you die, but after your spouse passes, the state pursues repayment through sales proceeds from the house, which complicates things for the remaining owners--your kids.

As you can see, deeding property to your descendants while you are still alive is fraught with hazards. It might be better to consider a transfer on death deed (TODD). With a TODD you still have full ownership and use of the property while you are alive. The title only passes to the beneficiaries after both you and your spouse has died. The TODD still allows you to avoid probate. However, it doesn't remove Medical Assistance claims, but the house can be conveyed to your beneficiaries and sold to pay off the MA claims. Any remainder from the sale would go to the beneficiaries.

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Giving valuable property to your loved ones can create some issues for them when they inherit. Talking to a qualified attorney or tax advisor is a good idea when you are planning how best to distribute your assets.

 

Personal Representative's Fees.

You've been asked to be the personal representative (aka "executor") of someone's estate. Congratulations, as that means the testator has entrusted you to perform an important job. While you might feel like it's your duty to volunteer your services for free and that it's a labor of love, you may not be fully aware of what's in store for you when it's time to serve. Being a personal representative is time consuming, it can be a lot of work, and it's often a thankless job.

The personal representative's responsibilities include filing the probate application or petition, notifying creditors and beneficiaries, collecting and securing the estate assets, filing an inventory with the court, filing the decedent's final tax returns, and distributing the remaining estate assets to the beneficiaries. On top of that you may find yourself refereeing family squabbles.

Therefore, you might want to consider asking for compensation for your services, and discussing this with the testator. You may be pulled away from your job and your family for a while to perform your duties, perhaps even requiring travel. Your time is valuable. It is perfectly appropriate to ask for fiduciary compensation and you are entitled to it under Minnesota law, even if compensation is not specifically addressed in the Will.

However, compensation for a personal representative must be reasonable and the statute does not give specific guidance on what rate to bill the estate. To determine what is reasonable, the court may consider the following factors: The time and labor required, the complexity and novelty of problems involved, and the extent of the responsibilities assumed and the results obtained.

For example, charging $250 an hour to haul furniture would likely not be reasonable, when someone might ordinarily charge $25 an hour for that sort of task. On the other hand, expecting a personal representative to only receive $25 an hour to professionally prepare the decedent's tax return would also not be reasonable. You may find it best to bill the estate at different rates for different tasks. If you are responsible for both hauling the furniture and preparing the taxes, you should bill at reasonable hourly rates appropriate for each job.

Typically, $25 to $50 per hour is an equitable range for most routine services, and higher rates might be appropriate in the case of professional services. It depends on the tasks you perform, in light of the statutory "reasonableness" criteria.

When it comes time for you to serve, keep detailed notes of the services you provide. Write down the tasks performed, the time you spent on each, and the hourly rate. Don't forget to list any out-of-pocket expenses you may have incurred, such as postage, filing fees, etc. The court will require you to account for all of your billing and expenditures. The decedent's heirs may also be keeping a close eye on your fees so be prepared to explain your billing to them.

Of course, your compensation as a personal representative is considered taxable income to you.

Is The Personal Representative Required To Serve?

The short answer, "No."

Being a voluntary fiduciary, the person nominated has the right to refuse to serve, and if appointed to serve, can resign from service. That is their choice and their right. People's lives change and serving as a personal representation can create hardships. It's time-consuming and a lot of work.

Sometimes, a nominated personal representative will face strong opposition from other heirs of the estate. The stress created by a death in the family sometimes brings out the worst in people. It might be in the best interests of family harmony (and avoiding the drama) for the nominee to step aside.

A nominee who has not yet been appointed by the probate court can simply refuse to accept an appointment. Since qualifying for appointment requires the nominee to file with the probate court, the person can decline to serve just by not filing.

However, if the person has been appointed by the court as personal representative and that person wishes to resign, there are some formalities under Minnesota law in what is called voluntary termination of appointment. As the appointed personal representative, the person must file a written statement of resignation with the registrar after having given at least 15 days written notice to the known interested persons of the estate. If no one applies or petitions for appointment as a successor within the time indicated in the notice, the filed statement of resignation is ineffective as termination unless and until a successor has been appointed and the estate assets have been delivered to the successor. The personal representative is not off the hook until another person is appointed.

If the personal representative declines to serve or resigns, and the Will does not nominate a successor, the court will appoint a personal representative based on priority set forth under Minnesota law. Generally, the surviving spouse or children have the highest priority.

This is why it is so important to nominate a second and third successor personal representative in your Will. It is also a good idea to review your Will from time to time, and to confirm that your nominated personal representatives still wish to serve when the time comes. If any of them express doubts, you should consider executing a codicil (amendment) to nominate different persons. A qualified estate planning attorney can help you review your Will.

Preparing For The Estate Sale.

Dealing with the death of a loved one can create an enormous amount of stress. That stress can be compounded when you sift through the decedent's possessions, as that may evoke strong emotions. But at some point, it will be necessary to dispose of those personal property items. If you are the appointed personal representative (PR), you have some work cut out for you.

Having been the PR for my parents' estate a few years ago, I remember the process.  Been there, done that. It takes up a lot of time and energy.

If the estate includes a homestead to be prepared for sale, it will be necessary to have those personal items cleared out at some point. If there is property in a storage locker, that will need to be disposed of, as well.

If the decedent left a tangible personal property gifts list, those listed items can be distributed. This may include family keepsakes, collectibles and other items that are given to the heirs when the estate is settled. 

What remains outside of that can still be a mountain of stuff, but it is considered part of the estate and therefore it must be accounted for. Furniture, household goods, tools, vehicles, etc., have value and should be sorted and prepared for sale. Keep a detailed list of items in a notebook or a spreadsheet.

The personal representative is tasked with disposing of the property, and if the estate is being probated, the PR will be responsible for making an accounting of estate assets. As a fiduciary, the PR has a duty to act in the best interests of the estate to preserve and maximize the value of the assets.

An important task is to secure the property. The personal representative should take all necessary steps to ensure that none of the assets "grow legs and walk out the door." This may require you to change the locks on the doors of the house. It's not uncommon for family members to show up and start digging into things, often with the view that "I'm going to inherit it anyway." You need to enforce a "look, but don't take" policy. However, it's generally OK to distribute a few small family mementos beforehand.

Legally, the assets remain the property of the estate of the deceased until it is time to distribute them to the beneficiaries at the end of probate, after creditors have been paid. If you are the appointed PR, your duty to the estate requires you stand firm on this issue. You may not be popular with some of the heirs, but such is the role of being PR.

There are a number of ways to effectively dispose of personal property items. You can hold an estate sale, often conducted in a similar manner as a garage sale. Certain items of known worth can be sold off individually. Be sure to keep receipts for any such sale, and deposit the sale proceeds into the estate account. DO NOT deposit any estate funds in your own account, as that is a big red flag that the probate court will take a dim view of.

If you don't have the time or patience to organize the goods and sell them yourself it might be more efficient to hire an estate sale company to sell them. Given the current COVID-19 pandemic, you might not want to be engaged in transactions with a bunch of strangers wandering through the house.

High value items, such as jewelry, coin collections, artwork, firearms, motor vehicles, etc., should be appraised before bringing in an estate sale company, so that you can have a rough idea as to the worth of the items. Estate sale companies often charge a commission, typically between 25 and 50 percent of the sale proceeds, so it is in their best interest to get the maximum sale price for the items.

Many of these estate sale companies employ people who are adept at determining the value of items. Don't throw anything away unless you are certain that it cannot be converted to cash. You might be surprised at what that ordinary-looking "pile of junk" can fetch.

When looking for an estate sale company, do some research and talk to more than one. That industry is unregulated and no doubt there are some bad ones. If you have the time, attend one of their sales and observe how it is conducted. Ask friends and colleagues, look at online reviews, check the Better Business Bureau. Ask the estate sale company for references.

If you are disposing of the assets yourself through a private estate sale, you will likely end up with many items that don't sell. Old clothing, kitchen items, knick knacks and such can be donated to thrift stores, like the Salvation Army. Non-perishable food left in the pantry can be given to a local food shelf. If you donate, get receipts for tax-deduction purposes.

After that, there will be things that should be thrown out. Broken and soiled items, containers of household chemicals, outdated clothing, junk, and "white elephant" items are best tossed out. If you anticipate there being a large amount of those kinds of throwaway items, you may need to rent a roll away dumpster.

Clearing out personal belongings can be a huge task. But as personal representative, you can enlist the help of a family member or two to help. But as PR, you are in charge and you must make it clear that property items and the proceeds they bring must be accounted for.

What's All This Testamentary Capacity Stuff, Anyway?

In cases of Will contests, the claims are sometimes based on whether the testator had "testamentary capacity" at the time he or she signed the Will. If lack of capacity is established by a standard of clear and convincing evidence (establishing a substantial probability of truth), the court will invalidate the Will.

Generally, most people at least 18 years of age are considered competent to make and execute a Will. However, the testator must be able to meet three more criteria to establish capacity. The testator must:

1. understand the nature, situation, and extent of their property;
2. understand the claims of others (heirs and beneficiaries) on their bounty; and
3. be able to hold these things in their mind long enough to form a rational judgment concerning them.

The mental capacity required to execute a Will is much lower than that required to enter into a contract. Suffering from periods of dementia alone does not necessarily preclude testamentary capacity. A Will executed during even a brief period of lucidity while possessing testamentary capacity in making those decisions, is valid. Also, a person subject to a conservatorship may have testamentary capacity.

Nevertheless, in a Will contest, clear and convincing evidence that the testator suffered from some type of dementia could be sufficient for the court to invalidate the Will on grounds of lack of capacity if any of the above three criteria are in doubt.

There may be other factors that give rise to a Will contest. The person contesting the Will might produce evidence of undue influence, such as a family member or caretaker who had exerted sufficient influence to override the testator's free will, with the influencing person receiving a bequest as a result. If the court finds clear and convincing evidence of undue influence, it could invalidate part or all of the Will.

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Determining testamentary capacity in the estate planning stage isn't always clear cut. However, issues of capacity can be addressed with the help of a qualified estate planning attorney.

Hope Is Not A Strategy.

[Despite the ominous title, this article is not about despair. We get enough of that from the news every day.]

Instead, this is a discussion about what can go wrong if you decide to put off your estate plan, or ignore it altogether. By relying on hope that "the legal system" will somehow make things turn out right when the time comes. By not weighing the consequences that might bite back if you leave your estate to the winds of fate, luck and wishful thinking. 

Granted, there are times in life when embracing hope is an uplifting and comforting thing. But framing your estate plan around the hope that it will take care of itself is not one of those times.

Let's look at a few ways things can go sideways if you ignore having a well-crafted estate plan.

Not having a Will.

While there are intestate succession laws to help distribute assets of a decedent who did not leave a Will, those laws are rather blunt tools, only intended as a sort of "safety net" to help keep assets in one's family to the extent possible. As such, it cannot anticipate every situation. Your assets may end up being distributed to family members you hadn't planned to give to, or in amounts you might not have agreed with.

Not having a Will also means that the probate court will appoint a personal representative to manage your estate assets. That person might be someone you wouldn't want serving in the role. It might be someone you don't even know. And you won't be there to make a better choice.

By having a Will, you can direct your assets to the people you want to receive them, in the amounts you choose to give. You can give assets to step-children, distant relatives, people outside your family, or to charities, choices that intestate succession doesn't accommodate. With a Will you can select personal representatives whom you trust to oversee your estate and carry out your wishes. You can also nominate guardians and conservators to act for the benefit of minor children.

Not having a Durable Power of Attorney.

If you become incapacitated, who takes care of your day-to-day financial needs? Who pays the bills, runs to the bank, manages your small business, deals with insurance companies and government agencies? Without a Durable Power of Attorney, you have no trusted agent assigned to take care of your financial affairs when you are unable to make those decisions for yourself. It may be necessary for a court to appoint a conservator to act on your behalf.

Not having a Health Care Directive.

What happens if you are unable to make health care decisions on your own? What medical treatment do you want and not want to receive? Where do you want to be treated? Who steps in to ensure that your values and wishes are being respected? If you don't have a Health Care Directive, the doctors have no guidance as to your preferred course of treatment. You won't have an agent in your corner to advocate for your best health care interests.

Not updating beneficiary designations on your POD accounts.

Have you looked over the beneficiaries named on your payable on death accounts, like life insurance, investments, and retirement accounts? It is important to do a review of those from time to time. Has your marital status changed? Is there a family member who is going through difficulties in life, like money problems or addiction issues? Are there new children or grandchildren? Have you lost a loved one recently? These are all events that should inspire you to revisit your accounts to make sure the named beneficiaries are up to date and those nominations reflect your current wishes. 

And by the way, if you have a Will, any of the above events are good cause for you to revisit that document, as well.

Hope is not a strategy. 

Relying on it to save the day in regards to protecting your estate is folly. But looking at the issue in a positive light, you can be proactive and start making plans for the future of your family. It's never too late to begin. A qualified estate planning attorney can help you get started.

Joint Tenancy vs. Tenancy In Common.

If two or more persons are purchasing real property, they have a few choices for how to hold title. The two most common are joint tenancy and tenancy in common.

Joint Tenancy.

Joint tenants are two or more owners who own equal shares of the property. Each owner's interest in the property is undivided, and all joint tenants have the right to use all of the property. Joint tenancy is typically the type of ownership among spouses. Joint tenancy includes the right of survivorship, which means that when one joint tenant passes away the surviving joint tenant automatically acquires ownership of the deceased person's share. The surviving joint tenant receives ownership without the property needing to be probated.

Tenancy in Common.

Tenants in common are two or more owners, who may own equal or unequal shares of the property. Tenants in common each own an undivided interest in the property and enjoy equal rights to use the property, even if their ownership share is unequal. Each tenant in common has the right to convey their share of the property and can transfer title.

Unlike joint tenancy, in the case of tenancy in common, there is no right of survivorship. When one tenant in common dies, that person's share passes to their heirs, and not to the other tenants in common. However, since the decedent's ownership interest passes through their estate, it may be subject to probate.

Tenancy in common is often used in cases when non-family members jointly own property, such as business property or a vacation home. Sometimes, spouses with children from prior relationships will choose tenancy in common, so that their shares can pass to their respective children after death.

If the deed does not specify the type of joint ownership, Minnesota law presumes the owners to be tenants in common.

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If you are in the process of purchasing real property, it would be prudent to talk to a qualified estate planning attorney to help determine what course of action is best for you and your family.

No-Contest Clauses: The Stick To Go With The Carrot.

In your estate plan, you make arrangements for passing on your assets to your family members and deciding who gets what. You want to be assured that your hard-earned assets will ultimately be conveyed to the people you care about and who have cared about you. The reward, or "carrot."

The troublesome part is trying to avoid family conflicts that may arise after you're gone. A death in the family brings out the best--and sometimes worst--in people. You don't want your children to be fighting over the estate assets or for anyone to feel as if they should have received a better share. Disappointed heirs and other interested persons may contest a Will, and it happens more often than you may think. 

To help ensure that your beneficiaries think twice before challenging the validity of your Will, you sometimes need to have a stick to go with the carrot.

That "stick" is what's called a no-contest clause, also known as an in terrorem clause. The no-contest clause is a brief paragraph added to your Will, stating that any beneficiary who contests or attempts to contest a Will automatically forfeits any inheritance that beneficiary might have otherwise received. The probate court then treats the beneficiary as if he or she had predeceased you, and the beneficiary's share will be distributed to your other beneficiaries, per the succession terms of your Will.

A big advantage of the clause is simply to discourage a family member from using the threat of a Will contest to force others to acquiesce and give up something they otherwise had a right to receive. The threat of automatic disinheritance can be very motivating against someone looking to cause trouble.

Keep in mind that a no-contest clause does not actually prevent a beneficiary from contesting the Will. Any person with an interest in the estate has standing to sue in probate court. The clause simply provides consequences for any person who does so, or even threatens to do so.

But no-contest clauses are not always enforceable by the courts and there's a catch: Under Minnesota law, the clause will be deemed unenforceable if there was probable cause for the litigation. What that means is if the beneficiary has sufficient evidence that the Will (or a portion thereof) is invalid, the court will set aside the no-contest clause and hear the case. An example might be if the beneficiary can produce evidence of coercion or fraud.

Although there is never any guarantee that a no-contest clause will be enforceable, it is still an important tool in your estate plan to discourage any of your heirs from challenging your intent, and to provide consequences if they do. 

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A qualified estate planning attorney can work with you to craft a Will that helps protect your assets for your family.

Divorce And Estate Planning.

If you are in the process of divorce, you have a lot on your plate. Division of assets, child custody, and the back-and-forth that goes with it can be tedious and painful. But there is another issue that should not be left out: your estate plan. Failure to update your estate plan after a divorce can result in some costly consequences.

If you die without a Will after the divorce is final, your former spouse will not receive any of your estate assets. However, your probate assets will instead pass to your heirs based on Minnesota's intestate succession laws. Intestate succession may then shift your assets to family members you had not planned on giving to. This is another reason why having a Will is so important.

If you have a Will and you die after your divorce is finalized but you had not changed the beneficiary designations in your Will, fortunately, Minnesota law fully and automatically revokes any provisions in favor of your former spouse. However, if you die before the court has issued the final divorce decree, your spouse still receives benefit from your estate, as you would still be legally married. Note that if you change your beneficiary designation and disinherit your estranged spouse, and you die before the divorce is final, your spouse will still be entitled to the spousal elective share.

Minnesota law also revokes any appointment of an ex-spouse as personal representative. However, until the divorce is final, that revocation of the spouse as personal representative is not automatic--you must affirmatively change that in your Will. If you are in the process of divorce, it may be wise to update your Will and nominate a new personal representative.

Here's the trap to watch out for: Divorce does not automatically revoke a former spouse as a designated beneficiary of your payable-on-death (POD) accounts, such as life insurance policies, annuities, retirement accounts, etc. You should change those designations as soon as possible. However, you will likely be prohibited from changing those designations until after the divorce is finalized.

Any power of attorney or health care directive you have executed that grants powers to your spouse as an agent is automatically revoked upon the commencement of divorce proceedings. You should execute new power of attorney and health care directives as soon as you or your spouse has filed for divorce.

If you are contemplating divorce or are in the process of it, or your divorce has been finalized, now is the time to revisit your estate planning documents. A qualified estate planning attorney can help you get started.

Can You Be On The Hook For Your Deceased Family Member's Debts?

When a loved one dies, you may be faced with the task of gathering their assets, determining what debts need to be paid and giving notice to the creditors. Valid debts are to be paid from the estate before the remaining assets can be distributed to the heirs and beneficiaries. Minnesota law sets a priority for which debts are to be paid from an estate--called Classification of Claims. If the estate assets are exhausted before all valid debts are paid, the estate is declared insolvent.

If the estate becomes insolvent, and there are debts remaining, you may have a question on your mind: Can the decedent's creditors hold me financially responsible?

In the case of unsecured debts, such as credit cards and utility bills that are in the decedent's name only, the answer is "no." However, if you were a joint owner of an account or a co-signer on a loan with the decedent, then yes, you would assume financial responsibility for the debt.

Nevertheless, unscrupulous collection agencies will sometimes pursue collection after death and may attempt to claim that you are responsible for a decedent's debt. They may hound you with calls and use aggressive tactics to harass or intimidate you. If you encounter such tactics, the Minnesota Attorney General's Office may be able to help.

In the case of secured debt, such as a home mortgage of car loan, it must be repaid or the lender can repossess the asset. If there are assets subject to secured debt, it is the responsibility of the personal representative or probate administrator to manage those assets. Until the property is sold, it is necessary to continue making payments to preserve the equity.

Since Minnesota law provides a priority of debts to be paid from the estate, it is important to first pay the high-priority debts, such as funeral expenses, taxes, and legal fees associated with the estate administration. Don't pay the lower-ranking debts at first, such as credit cards and other unsecured debt. Those can be paid after the high-priority debts, if there are still sufficient funds in the estate.

If the estate assets run dry before all the debts are paid, the personal representative must declare the estate insolvent. If you are an heir or beneficiary named in the Will, unfortunately, you won't receive a share of assets from the estate.