It’s become fashionable to dispense advice far outside one's expertise. Even presidents opine on the use of bright lights, bleach, and horse medicine to cure covid. As is usually the case, Donald, most such advice is better left unsaid.
This is not new. For example, when I was in practice, more than one client asked me to “put their kids on title” so that they could save money on probate. Usually they got this idea from the internet, or from a local seniors' magazine, or a friend trying to be helpful. Sometimes it made sense to do so, but rarely.
Let’s look at some scenarios and test this idea.
Jim and Elsie have recently retired. They’re selling their home in the city and buying their dream home on the lake. Somebody has suggested that they should also put their two kids, Susie and Bobbie, on title as joint tenants so that “when something happens to Mum and Dad”, the kids will just inherit the lake property automatically without the need for probate and paying the hated probate fees.
Background: the purchase price was $750,000. Bobbie lives in California, while Susie lives in Ontario and is on her third marriage, which doesn’t look any more viable than the first two. She has substance abuse issues, and can’t hold down a job. Bobbie and Susie have little relationship beyond having the same parents.
Scenario A: Title is put into the names of the parents only. Twenty years later, "something happens to Jim and Elsie". To be precise, they are eaten by the infamous Christie Lake Shark. The cottage falls into the estate, and is appraised at $1,750,000. Given that the cottage was Jim and Elsie's principal residence, there is no capital gains tax. The executor pays nearly 1.5% probate tax of about $26,000. Total. She then liquidates, and distributes the proceeds.
Scenario B1: Same story, except that title HAD been put into all four names. Since neither Bobbie nor Susie had ever lived in the property, they could not claim it as their principal residence, and capital gains tax accrued to them. On a total gain of a million dollars, the two kids would face a tax bill of over $50,000 each on their share, that is, over $100,000 in total. So much for avoiding the hated $26,000 probate fee.
Scenario B2: Susie’s fourth marriage collapses, this time the spouse is a litigious, “take no prisoners” SOB who sues her for half her interest in the cottage. Whether he wins, or not, there is a scorched-earth battle with a lis pendens order preventing any dealing with the cottage in the meantime. Legal costs covered by Jim and Elsie's savings.
Scenario B3: Bobbie’s software business goes belly up, owing creditors tens of millions of dollars, most of which Bobbie has personally guaranteed. The creditors, or the trustee in bankruptcy, go after his interest in the cottage. The Bank of Mom and Dad steps in to fix things.
Scenario B4: After the Christie Lake Shark episode, Susie and Bobbie now own the cottage as joint tenants. Susie and her biker boyfriend "Ti-Rex", decide to move in. Bobbie demands that it be sold. You take it from here. (Spoiler alert: the cast of characters will include law enforcement and TV crews.)
Those last four scenarios are just four of dozens of variations, none of which reflect very well on the “put the kids on title” free advice.
Scenario C: Elsie calls into the office to advise that Jim had been eaten by the Christie Lake Shark, and that just the day before she had been given a terminal diagnosis, with a maximum of three months to live. She says that Susie was now single, dry, and sober, and that Bobbie and Susie are now the best of friends and agree on everything. Would it be a good idea to put the kids on title? I tell her I’ll swing around on the weekend with the paperwork.*
Experts and professionals are experts and professionals for a reason. They know about estate planning issues, or soil load factors, or the combustion point of various materials, or tension-compression factors on bridges, and many other things which if violated can cost lives and fortunes.
So, even if you’re everybody’s "Favorite President", let’s leave the horse pills in the barn and the technical advice to the pros.
* Yes, the capital gain issue remains, but for the short period of time Bobbie and Susie are going to be on title, it will be inconsequential
Forward to a friend
Can I help you or your organization? Contact me at email@example.com or at 613-862-3489.
Friday Briefing Archives