One of the critical reasons to engage in estate planning is that the upfront costs to establish the proper estate planning strategies often cost much less than the trouble that can arise if a person does not create a proper plan. One of the most costly types of estate planning errors involves the methods that a person utilizes to convey property to loved ones following death or incapacity. 


A unique challenge presented by many individuals currently engaged in the estate planning process is that they have been in their “home” or property for many years, during which time the worth of the estate has increased substantially. Consequently, a transfer of the property creates long term gain complications, which means that listing a beneficiary on a property deed is often not the best type of estate planning strategy. 


The Challenge Presented by Listing Beneficiaries


Most people list beneficiaries on various estate planning documents including life insurance policies, retirement accounts, and trusts. Consequently, these individuals often make the mistake of thinking that it will present little harm to name a beneficiary on a deed. Even if a person is aware of the risk presented by transferring property in this way, these individuals often want to avoid the probate process because this presents the risk that the public might be able to see what assets are transferred. Others care little about probate, but are focused on the “spend down” process for Medicaid and are merely attempting to greatly reduce the value of their assets.


Consequently, if an individual passes a home to a beneficiary before death or incapacity, the Internal Revenue Service views the property as a capital asset. Because the values of most homes that were held for several decades have risen dramatically, the property owners often face a significant amount in taxes. This can result in a significant blow to estates that would otherwise have little to no debt. 


While Oklahoma law currently provides for a 100% deduction for the sale of any property in the state, there has been much debate in the state about ending this exemption. Capital gains can also be an issue if an inherited property is located outside the state. There are several other tax complications created by transferring property in such a manner. Fortunately, some strategies can be utilized to avoid paying a sizable amount in taxes. 


Options to These Methods


Several estate planning strategies can be utilized to avoid facing the taxes associated with placing a beneficiary on a deed. For one, a person can place a property into a living trust so that it is later sold and the assets passed on to beneficiaries. While this process avoids some gifting complications, it does mean that the property will be classified as a capital gain following a transfer.


A second estate planning strategy is to utilize a life estate deed that passes the property following the individual’s death. This way, following a person’s death, the life estate is terminated and the property transfers to the appointed beneficiaries.


Speak with a Knowledgeable Estate Planning Lawyer


The estate planning process is a complex one, but it can help ensure your loved ones avoid many complications. If you need the assistance of a knowledgeable attorney for your estate planning, do not hesitate to contact attorney Jim A Lyon today.