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Notes -
What advantages do trusts have?
The trust is eternal so it escapes inheritance taxes. The fact that it's not technically the property of the person receiving the benefit provides some protection against lawsuits, liabilities, certain government actions, etc.
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Not much. The biggest reason to use them is to avoid probate. So you have a revokable trust, and then when you die it goes to the trustee(s) more easily. But it is still very much taxable if above the $13 million limit.
To avoid inheritance taxes, there might be other things you can do. For example, you can give up to $19,000 a year tax free each year that doesn't count towards your estate tax. And when you die, give your money to your grandchildre instead of your kids, so that you only pay estate taxes every other generation.
There's probably more you can do, but there aren't nearly as many loopholes as people think, at least for the minor gentry.
I've got things set up to avoid probate with ToD deeds & orders (except the worthless junk cars, annoyingly), but I guess that would be a lot more complicated with billion-dollar estates where you might want to break up properties and change your will every time there's a new grandchild.
Not that anyone with under 27 million needs to think about this in the first place, as long as they're married.
Oh boy. As you may know, I'm an attorney, and before I proceed I want to give some general disclaimers. First, I'm not your attorney and none of what I'm about to say should be taken as legal advice. I don't know your exact situation or even the state in which you reside, so I'm not in a position to give specific advice. As for my qualifications, I had my own practice between November 2019 and May 2023 and I did estate planning and administration work, but not exclusively. This work was in Pennsylvania, which does not have ToD deeds. For a decade, includign when I had my own practice, I did oil and gas title work. While this may not seem like it has much to do with estate planning, a large part of it was dealing with the consequences of poor estate planning and figure out how to clean everything up. I did this in Pennsylvania, Ohio, and West Virginia. OH and WV have ToD deeds, but I didn't see them much, for reasons I will make clear below. I currently do litigation in PA and WV primarily and still do estate work very occasionally, but it's more of a side gig where someone will ask me about a will and I'll do it through my firm or a coworker's friend will ask them and I'll get it because I'm one of the three people here who have done that kind of work. I don't mess around with anything that involves the Federal Estate Tax or the word "irrevocable", but I've been to plenty of seminars involving this kind of stuff so I have a decent working knowledge. Basically, I know enough about it to know that it's a liability minefield I don't want to get involved in.
With that out of the way, I'd generally recommend against ToD designations for real estate. Certain charlatans like Suze Orman try to convince everybody that probate is the worst thing in the world and is to be avoided at all costs, but that's not necessarily true. One of the most common questions I was asked when I did estate planning is a variation of the following question I actually got a call about a couple months ago: A woman's husband recently died. She had three children, including a 36-year-old unmarried son who was living with her. She already had a will that left the house to the son, but asked me about possibly conveying the house to the son. Her intention was to avoid the 4.5% inheritance tax.
My answer was an immediate and unequivocal "no". Her plan would only work if her son stayed in the house and continued to live there indefinitely after her death, and he continued to be a responsible single guy in good health with no financial difficulties. The most obvious issue, though, was the tax issue. If the son continues to live in the house after she dies then it's not a problem. But the woman is only in her 60s; she could easily live another 20 or even 30 years. Suppose the son buys his own house in the meantime. When his mother dies, he now owns a house that he doesn't live in. If he sells it, he takes a short-term capital gain that is taxed as regular income since he isn't entitled to a homestead exemption. To make matters worse, the capital gain is on the entire sale price, since he got the house for free. On the other hand, if he inherits the house in that situation and wants to sell it, he can take advantage of the step-up in basis and only pay capital gains tax on the difference between the sale price and the market value at the time of death, which is likely to be zero. He'd still have to pay inheritance tax, but this is only 4.5% as opposed to the 20%+ he'd be paying in capital gains tax.
Beyond tax considerations, though, this woman would risk dealing with what I call the five Ds:
Death: If her son dies before she does, the beneficiaries of his estate will become the owners of the property. The woman probably assumes that she'll outlive her son and even if she doesn't, he'd leave his estate either to her or another family member, but he could leave it to anyone. It could end up in the hands of a charity or an ex-girlfriend who is disinclined to let this woman keep living there for free.
Divorce: If her son were to get married, the house could be an asset subject to distribution in any subsequent divorce proceeding.
Disability: If her son becomes disabled, owning a significant asset will affect his eligibility for SSDI, Medicaid, and various other benefits.
Debt: If the son were to file for bankruptcy, the house would be an asset subject to distribution to creditors. Chapter 13 bankruptcy allows debtors to protect equity in a home by entering into a payment plan instead of liquidating the estate. The catch is that the payment plan has to raise at least as much money as the creditors would get in a Chapter 7. This realistically isn't an issue, since most people filing for bankruptcy don't own their houses free and clear; they've already mortgaged them to the hilt. If the house isn't complete shit it probably forces him into a 100% plan, which could be unfeasible depending on the amount of debt. Worst case scenario he's forced to sell the house to cover the debt. On the other hand, if he doesn't own the house it's likely a no-asset Chapter 7 or a straightforward Chapter 13.
Dumb: People do dumb things all the time. He could mortgage the house to buy a boat and leave her vulnerable if he can't make the payments. He could neglect to pay property taxes. He could try to save a little money by not insuring the property. He could decide to rent out an extra bedroom to a hobo. Those examples are downright idiotic, but even well-intentioned gestures can fit this category. Say he wants to do some kitchen renovations. His mother thinks he's just paying for them, but in reality he took out a home equity loan. Six months later he loses his job and can't make the payments. Now she's looking at foreclosure as the result of actions she had no control over.
ToD deeds were created as an attempt to mitigate the effects of the five Ds. By creating a revocable future interest in the property instead of an irrevocable present interest, the beneficiary can't really do anything to affect the property while the grantor is still living. Sounds good, but this creates its own problems; by taking assets out of probate, any issues must be dealt with outside of the probate process. Probate isn't a boogeyman. It's a process specifically put in place to deal with these kinds of issues. Wills allow you the flexibility to provide precise instructions regarding your intentions, and allow you to appoint an executor to ensure that these instructions are carried out. Probate courts provide a forum to resolve any issues that arise. Outside of probate court and it's centralized process; you're out of luck. Just a few issues I can think of the top of my head, using the above case as an example:
Instead of conveying the house outright, the woman executes a ToD deed naming her son as the beneficiary. Several years later, the son becomes disabled and cannot work, and relies on government benefits. The mother then dies. The son now has an asset that cuts off his eligibility. Hod the house been transferred by will, she could have created a provision that created a testementary trust in the event that any named beneficiary were receiving benefits at the time of her death, and the trustee would have been able to ensure that the house would remain property of the trust for the son's benefit and that he could continue living there and receiving benefits.
The woman executes a ToD deed conveying the house to her son and two other children in equal proportion upon her death, at which time the house is worth $300,000. Two of the children want to sell the house and get their $100,000 share. But the son, who is still living there, doesn't want to sell, and correctly claims that as part owner he has the right to the premises. He further refuses to buy out his sisters' interests. If the sisters want anything out of the deal, they'll have to file a partition action, which will cost 5 figures and could take years to resolve. They're also unlikely to get their full shares, since the son will be able to claim any mortgage payments, taxes, repairs, insurance, or any other allowable expense he made towards the house over the course of his time living there. The house will be sold at auction, invariable resulting in a lower sale price than could be had if it were properly marketed. A will could expressly include buyout provisions (I usually included these if a child was living in the family home), expressly direct the executor to sell (though he could sell to the son), or give any number of other guidelines. Even in the absence of these, this is a dispute the probate court would be able to resolve before title ever transfers. It could get complicated, but nowhere near as complicated as a partition.
The son gets married and has a child. The woman executes a ToD deed naming the son as beneficiary and the child as contingent benificiary. The son predeceases the woman. The woman then dies while the child is still a minor. The mother is still alive. The mother now has to petition a court to establish a legal guardian for the child's estate, so that the real property can be managed for the child's benefit until she is of legal majority. This is a complicated and expensive procedure. If the guardian wishes to sell the house to use the money for the child's ongoing support, they need to get a court order. If they sell the house and get the cash, they're required to invest the money and only spend the interest; if they need to dip into the principal, they need a court order. They need to file an annual accounting with the court. It's a complicated process. On the other hand, and will would contain automatic trust provisions for the event that a minor had to inherit a major asset. The trustee could be named in advance, and the trust set up shortly after death without court involvement. The trustee doesn't need court approval to do anything, and the accounting requirements are much looser.
The woman executes a ToD deed with her three children as beneficiaries in equal proportion. The house is the only item of value in the estate. Shortly after the woman's death, the children sell the house to a third party. They do not consult an attorney because they believe that since they aren't opening an estate and there's only one asset they don't need to. A year later, a man claiming to be a creditor of the woman calls the son, asking about the money he is owed. After the son tells him that his mother passed and no estate was opened, the man discovers the ToD deed and subsequent sale to the third party. He then sues all three of the woman's children for their pro-rata share of the debt. If the woman had a will, or died intestate, the estate would have been advertised and the creditor would have had a chance to make a claim. The executor could have settled the matter out of the proceeds of the sale before the money was distributed.
These are just a few things I can think of off the top of my head. The point is, DIY estate planning is a bad idea. I talked to a lot of people, smart people, who thought they were doing something really smart by avoiding paying a lawyer to have a proper estate plan done. These people usually ended up doing things that would cost their estates significantly more than the most expensive estate planning lawyer in the area would charge. A couple thousand bucks may sound like a lot, but you have no idea how easy it is to spend that much when an estate goes haywire. People who tell horror stories about probate are usually referring to instances where something got fucked up and the matter was held up or needed to be litigated. These are unfortunate circumstances, but in no case was there some easy self-help fix that could have avoided the situation. Please, consult with an attorney as soon as you can.
None of that's an issue, and both I and my father already have wills as backup anyway. But unless we die in the same accident there shouldn't be anything for the executor to do.
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