Do-it-yourself estate plan goes awry

Sandra Reed
Sandra Reed

“I want everything to be simple, simple, simple, when I go,” Brooke begins. “I want to divide my estate equally among their three children. And I’ve mapped out a plan to dispose of my property without any probate whatsoever. I put it together from what I’ve read on the internet. It’s just marvelous what you can learn by Googling things, don’t you think?”

“In some instances, yes,” lawyer Joe agrees tentatively. “But I don’t generally recommend the use of estate planning documents pulled from the internet. They are too often generic and not tailored to a particular state’s law.”

 Then Brooke says “Last month I deeded my home to my three children, retaining a life estate for myself.”

Joe forces himself not to sigh, since the deed has literally already been done. Obviously, Brooke has not contemplated that there might be a need for her to sell or take out a reverse mortgage on her home if the money she has to live on were to run out before she dies.

Then there’s a tax issue he has to call to her attention.

“Have you discussed with your accountant that this transfer creates a taxable transaction and that you need to file a gift tax return because of it? Of course, your life estate diminishes the value of the gift and your estate is not large enough that you will actually have to pay a tax.”

Brooke looks chagrined. “No, I don’t understand. There wasn’t any tax when my husband died and left me his part of the house.”      

“That’s because transfers of community property between spouses aren’t taxable events.”

There’s another tax issued involved here.  “Also, the house passed to you at your husband’s death, so you got a stepped-up basis, meaning that, assuming the house had appreciated in value since you bought it, you would only have to pay tax on the difference in that increased value at your husband’s death and what you sold the property for.”

“Are you saying the children won’t get that new basis?”

“That’s what I’m saying. The stepped-up basis doesn’t apply to a gift made during your lifetime. But when the children get ready to sell the house, the basis will be the value at your husband’s death, even if the property has increased in value by the time of your death. They will have to pay tax on the difference between that value and what they sell the property for.”

“Well, gosh, I guess I should have come to you before I did that.”

“I wish you had,” Joe says.

Sandra W. Reed is an attorney with Katten & Benson, an Elder Law firm in Fort Worth. She lives in beautiful Somervell County, near Chalk Mountain.