This column first appeared in the San Antonio Express News and other Hearst Newspapers on April 29, 2019.
Dear Mr. Premack: I like life hacks and I like doing things myself. I graduated from college. I am smart. I own a ranch and live on the land with my family. I figured out a way to avoid getting legal documents like a trust and a financial power of attorney and want to get your opinion on it before talking about it with my wife. My idea: put our accounts in my wife’s name and put the land in our children’s names. The way I figure it, when something happens to me, they won’t need to do any of that courtroom mumbo jumbo that costs a few thousand dollars. What’s your take on the workaround idea? – WW
To a certain extent, everyone does some of their own estate planning without consulting their attorney. Once you understand the context and effect of a decision, you don’t always need to ask your lawyer’s opinion. That said, there are some planning concepts that are very technical and, if done incorrectly, can cause heartache, increase expenses, block progress, or increase taxes (among a few of the possible negatives).
Your first proposal is to put all your accounts in your wife’s name. While it is true that she will then have full control of and access to the accounts, it is also true that you will completely lose control of and access to the accounts. Even if the accounts contain community property (your earnings and savings), when you put them into her name alone, she becomes the sole manager of the accounts. It is true that if you die first, she will not have to go to probate court. It is equally true that if she dies first, you will be required to go to probate court in order to access and claim the accounts.
An alternative is to talk to your bank about using joint accounts with rights of survivorship. The law and your contract with the bank would specify that, when either of you dies, the other owns the accounts without the need all that “courtroom mumbo jumbo”. You could even ask the bank to set up “pay on death” designations so the accounts will be treated as belonging to your adult children if you both die.
Your second proposal is to put your ranch into your adult children’s names. While it is true that when you die there would be no need for “courtroom mumbo jumbo” the negatives far outweigh that single positive. Gifting the ranch to your children has these irreversible consequences:
First, the children will be co-owners. What structure will they follow to make decisions? Legally each of them has full control, so they can contradict each other. Will they decide to manage by majority vote? Will they defer to your requests? If they argue, management of the ranch could come to a money-losing standstill. If one of them dies, you may be dealing with their spouse or your grandchildren.
Second, the children will be co-owners. You will not be an owner. Your wife will not be an owner. If you have a disagreement with the owners, legally they can evict you. You will have no legal control.
Third, transfer of the ranch to them is a gift. You will, at minimum, have to file a federal gift tax return. Depending on the value of the ranch, you may have to pay gift tax to the IRS.
Additionally, because your children become owners by gift, they lose the tax-saving “free step up in basis”. If they sell the ranch in the future (even after you die) they will be hit with capital gain taxes that are many times more costly than the proper legal planning you could have done to avoid the “courtroom mumbo jumbo” and the tax increase.
Finally, the ranch is not your children’s homestead. And since you don’t own it anymore, it is not your homestead, either. Consequently, there will be a significant increase in your local property taxes. These higher taxes will be due every year for the rest of your life, and will likely cost way more than the “courtroom mumbo jumbo” you could avoid if you use your smarts to do proper legal planning. Additionally, since the ranch is not homestead, it is subject to a creditor’s claim if any of your kids have financial issues or cause a car accident. Hence, my take on your workaround idea is that you should use your smarts to benefit your family instead of torpedoing them.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.