When Attempts to Avoid Probate Go Very Wrong

Probate is seen by most as a very negative process and one to be avoided at all cost.  Probate is not the big, bad wolf, it is simply the legal process that takes places after someone dies.  The primary purpose of the probate process is to pay the deceased person’s debts and taxes and transfer his property to his heirs and beneficiaries.  True, probate is time consuming and can be costly.  However, sometimes an attempt to avoid probate can end up costing a person much more.

Example- John, hearing about the horrors of probate, decides to gift his home, which he purchased in 1951, to his children now, rather than have the home go through the probate process when he dies.  John has likely just made a big mistake.  Under current federal tax law, since John gifted his assets to his children they received the home at John’s cost.  Hence, when the children sell the home, unless they live in the home for two years after John dies, they will have to pay capital gains tax on profit from the sale of the home- that is the difference between how much John paid for the home in 1951 and the sales price.  John could have avoided probate and capital gains by creating a Transfer on Death Designation Affidavit or a trust.  (However, if John or his wife are planning on applying for Medicaid, neither option may be advisable).  

Estate planning is best done by estate planning professionals and it does not need to cost you a fortune.