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The Dangers of Self Help

The following are some common self help methods of Estate Planning and their potential consequences.

Joint Ownership With a Spouse

Couples will often place each others names on real property. Unfortunately, these deeds may not include the proper language of “A and B as joint tenants with rights of survivorship.” For example, they often say “A and B” or “A and B, as Husband and Wife”. In each of these cases, the property is actually owned half by each of the parties (as co-tenants) and the decedent’s share will not automatically pass to the surviving spouse. Thus requiring probate.

It should also be noted that a valid joint-tenancy may be converted prior to the death of either party into a co-tenancy by either party. There is a reported case where a disgruntled wife sold her interest to her mother and after litigation, the court ordered the husband to allow the mother-in-law, whom he detested, to live in one half of the parties’ residence. Depending upon the circumstances it may be safer to place the property in a trust.

Placing a Child's Name on a Deed

Another common practice is to execute a "quit claim" deed which adds a child's name as a joint owner of the property. Upon the recording of such a deed, the child immediately obtains an interest in the property, and upon the death of the other joint owners will succeed to full ownership (assuming a joint tenancy with rights of survivorship). However, because the child gets an immediate interest in the property, that interest is subject to the rights of creditors. Therefore a home could be sold to satisfy the demands a child's creditors before the death of the joint owner parents. At the time the property is sold by the creditor, the parents would be entitled to only a percentage share of the sale proceeds. A trust is definitely safer in this circumstance.

A Quit Claim Deed to a Child

Another common practice is to"quit claim" property to a child during the parent's lifetime. If such a deed is recorded, the child immediately acquires full ownership of the property. In this case, the entire property can be taken to satisfy the demands of creditors. Since the parents have no legal interest in the property, they will receive nothing if the property is sold. Further, if they remain in the home, the fair rental value of the property may be considered income by the IRS. A better procedure would be to execute a quit claim which reserves to the grantor (parents) a life estate. This means that the parents own the home and are entitled to live in it until death, at which time the property then fully belongs to the child.

A Deed in the Drawer

Another common practice is for parents to execute a deed transferring property to their children, placing it in the desk drawer, and then instructing the children that at the time of death they are to retrieve the deed and record it. Unfortunately, such recordings are invalid in most states. If a deed is not delivered and recorded during the lifetime of the transferor (called the grantor) it is not considered a valid transfer. However, the same thing can be accomplished by executing a deed and then giving it to an escrow agent with specific instruction that the deed is to be recorded upon their death. Another problem occurs if one of the children has predeceased the grantor. Their estate will then have to be probated to pass their interest to their children. Again a trust would be much safer.

A Deed With an Oral Reservation

This is where a deed is delivered which is express or absolute on its face in conveying title, but the grantor “orally” states that the deed is to be effective only on the grantor’s death. The general rule in this case is that an absolute transfer has occurred. The grantor has no further interest in the property. The grantee (or recipient of the property) is now the sole owner of the property, is entitled to possession, notwithstanding any equitable claims by the grantor, and may sell the property. This means that a child could dispossess their parent. Further, tax implications may arise if the grantor continues to live in the property. Sometimes this situation can result in litigation as the other siblings attempt to impose a “constructive trust” on the transaction if the property is still in existence at the time of the death of their parents.

A Deed With a Written Condition

The next situation is where a deed is absolute on its face but contains a written condition. For example, that the transfer is only valid on the grantor’s death or if a person marries. The courts have resolved the matter in a number of ways. However, the general rule is that the transfer is invalid.

A Joint Bank Account With a Child

Many individuals will put a child on their bank account under the assumption that at death the child will divide the bank account proceeds evenly with their brothers and sisters. However, generally there is nothing the other brothers or sisters could do if the child choose not to share the proceeds. Under the law all of the proceeds in the account belong to whoever's name is on it. They are also responsible for any tax consequences related to receipt of the funds. It is possible that the siblings could go to court and impose a constructive trust, but only if the parents and child had signed a document indicating their intent and that document has been provided to the other children. Using a POD (or Pay on Death) Account is much safer, although it has problems if any of the children are under 18.

Masking Tape Name Tags

Another common practice is to put name tags on the bottom of every nicknack or item of furniture. While this may make a lot of sense, it is legally unenforceable and there is no guarantee that the property will actually go to the individuals designated. It is amazing how many children will sneak into the house and rearrange the labels. A will with a dresser drawer list works better.

Drafting your own documents

If your estate planning documents are not properly prepared they can be declared invalid or some of their provisions ignored. For example, in some states if you mix typed text with holographic text the entire document is invalid.

Giving a Child a Power of Attorney

Another common tactic is to give a child a general power of attorney. The child is then instructed to use the power after death to execute the appropriate documents. There are two problems with this practice. First, the child can use the power of attorney immediately and do anything the parent might do, like sell the parents house out from under them. Second, a normal power of attorney terminates on the disability of the person giving it. And third, all powers of attorney terminate on death. A better practice is to use limited powers of attorneys for specific purposes. If you want a general attorney, make it a durable general power of attorney and hide it in the drawer to be brought out only when necessary.