Asset transfer mistakes can be easy to make without professional estate planning.
Handoffs are not always easy.
Whether it involves transferring the baton in a relay race, a handoff from center to quarterback, or passing the ball to a teammate in soccer, precision is key.
A simple miscalculation can lead to failure.
According to a recent GoBankingRates article titled “I’m a Financial Planner: Here Are 5 Mistakes You Must Avoid When Transferring Property to Heirs,” the same is true of transferring assets in estate planning.
With family dynamics as well as state and federal laws to consider, it is important to work with an experienced estate planning attorney to avoid making asset transfer mistakes.
What are some of the most common pitfalls of transferring assets to heirs?
One of the most devastating and easily avoidable mistakes is failing to create a valid last will and testament.
Those who die without a last will and testament are deemed to have died intestate.
What does this mean?
It means their local probate court will decide who inherits any of their belongings that are subject to probate based on state law.
Typically, heirs will be identified as next-of-kin.
While this may sound straightforward, it is not.
The term “next-of-kin” is defined differently by states.
Priority is typically granted to the surviving spouse, biological and adopted children, parents, and siblings.
If none of these individuals is an option; grandparents, uncles, aunts, nephews, nieces, cousins, and other extended family members are then considered as heirs.
Educating yourself or seeking professional guidance on the intestacy laws of your state could help alleviate surprises for your loved ones if you have no last will.
For example, some states will treat half-siblings and full siblings equally, while others will give preference to full siblings.
Although understanding the intestacy laws of your state can be helpful, the best way to facilitate successful asset transfer to heirs is through proper estate planning.
For example, say your estate includes a home.
One way is to create a last will and specify that your heirs inherit your upon after the probate of your estate.
If you want to avoid probate and have the home pass directly to your heirs, then create a new transfer on death deed to transfer the home upon your death.
Both Kansas and Missouri provide for such transfer on death deeds.
This is especially helpful if the property is jointly owned by a married couple.
In estate planning, there are four basic ways property can be owned.
The first is for the property to be owned as joint tenants with rights of survivorship by two or more people.
The second option is for the property to be held in a trust.
The third option is for the property to be owned in a way where it is subject to the terms of the last will, such as by one person or by more than one person as tenants in common.
Finally, the fourth option is for the property to be held under the third option, but without a last will.
This last option subjects the property to intestacy laws due to a lack of an estate plan.
Each of these options is handled differently.
The first two options avoid the court.
When the property is jointly owned by spouses, the right of survivorship means the widow, widower, or other surviving joint owner will become the sole owner.
This allows for probate to be avoided and for the deed to remain unaltered in most cases.
A surviving spouse may also be required to file a copy of the death certificate and a survivorship affidavit to transfer the property title to his or her name.
If only one spouse was listed on the deed, then a last will directs the property through probate.
If there is no last will under this scenario, then the home will be subject to intestacy probate.
Consequently, many people wonder if it is better to transfer assets while they are still alive.
In some instances, this can be wise.
In others, it can create issues.
If you give your primary residence to your adult child while you are alive and the child chooses to sell the property while it is not his or her primary residence, your heir will receive a significant capital gains tax bill.
By waiting to transfer the property at the time of your death, your heir would enjoy a step-up in basis for the house.
In the current housing market and economy, this adds up to significant capital gains savings.
Although transferring a house to another person may seem generous, it can be a burden to someone unprepared for the responsibility.
You should discuss your wishes with your possible heir to ensure they understand and agree to the demands associated with owning a home.
If you hope to name more than one heir, this conversation is of even greater importance to ensure everyone is on the same page.
When children are prone to arguments are have vastly different financial situations, you may trigger family feuds by leaving an asset to be managed by more than one person.
Having conversations and explaining your wishes in writing through your estate planning can help reduce the chances of resentment and estate battles.
Although following this advice is a helpful start, the best way to avoid common mistakes in asset transfer is to work with an experienced estate planning attorney.
Reference: GoBankingRates (July 26, 2023) “I’m a Financial Planner: Here Are 5 Mistakes You Must Avoid When Transferring Property to Heirs”