They say ignorance is bliss, but I think that bliss is confined to the mind of the ignorant. Everyone else has to endure the misery caused by the blissfully ignorant. I don’t use the word ignorance as a slur or in an insulting manner, but merely as a descriptor. Ignorance is just lack of knowledge of a particular subject matter, and it is not an incurable disease. The problem, as I have encountered it in representing hundreds of clients in estate planning and elder law matters, is that folks don’t know what they don’t know.
Frequently, clients come to me after they have made monumentally disastrous estate planning decisions based on what Grace said at church on Wednesday night, or what their children told them, or what they heard on the radio. Sometimes, these mistakes can be fixed, often they cannot.
Before someone can make good decisions about estate planning matters, he or she needs to understand, at least on a rudimentary level, the basics of estate planning. I cannot stress enough how important it is to get good counsel from an estate planning or elder law attorney before making estate planning decisions and acting on them. This is truly one of those areas where an ounce of prevention is worth a pound of cure. I know we all love our kids and think they are smart and capable individuals (after all, we raised them), but unless your child is an attorney who focuses on estate planning and elder law issues, he or she is not qualified to give you legal advice on such complicated issues. If you wouldn’t let your children operate on you, you might also want to think twice about letting them do your legal work. Do yourself a favor, and get some help, some qualified help.
The most common mistake people make when they engage in do-it-yourself planning is that they give away their property during their lifetime. From an estate planning and tax perspective, this is usually always a mistake. I almost never advise clients to transfer property to their children during life, but rather to die owning their property with a solid estate plan in place so the children inherit it when they die. Typically, people make this mistake based on a prevalent myth in estate planning. That myth is that once you reach a certain age, you must start transferring everything you own out of your name so that the state or the nursing home doesn’t take it. I frequently hear this myth repeated as if it is the Gospel. It is simply not true.
First, the state will never take your property from you to pay for your long-term care needs in the event you need to be placed in a nursing home. It simply does not happen. They will, however, refuse to pay for your care as long as you have assets sufficient to defray the costs. This is a policy that makes sense. After all, do we really want the government and our tax dollars paying for the long-term care needs of someone who owns millions of dollars’ worth of real estate, for example?
Second, when you place your home and other property into your child’s name, you are taking a major risk with your financial security and your independence. Transferring property to your child means that should you ever need to sell or mortgage it, it will require your child’s signature (i.e., the permission) and, the unthinkable, his or her spouse’s signature. By titling the property to them, you have effectively given them veto power over every major financial decision you may want to make in your life going forward. If that’s not scary enough, what if your child goes through a divorce and the spouse walks away with some of your assets? What if your child makes unwise financial decisions and loses the property? Except in rare circumstances, I never counsel clients to divest themselves of their property during their lifetime. It’s simply too risky. The good news is there are better ways to properly plan for long-term care without doing so.
Another reason for keeping your property until death is to avoid the capital gains tax. Here’s how it works. If you bought your house in 1980 for $100,000.00, your tax basis in that property for capital gains tax purposes is $100,000.00. If you then give it to your child during your life, he or she will take your tax basis of $100,000.00. If, at any time thereafter, the child sells that property for $200,000.00, she will pay capital gains taxes on a profit of $100,000.00. Depending on your tax bracket, that could mean a lump sum tax payment of more than $20,000.00.
If, on the other hand, you waited and your child inherited the property at the time of your death, he or she would receive a “stepped-up basis” to the fair market value at the time of your death, in this case $200,000.00. So, if it is later sold for $200,000.00, there will be no capital gains tax assessed on the profit.
Isn’t it amazing what a little planning can do?