Transferring property

Dear Len & Rosie,

My father transferred his ownership of his house to two of my brothers. He wants the profit divided into equal shares among all five children after he dies. My father is still alive and three of his children were out the state at the time during the transferring of the title of the house. My two brothers agree to add three of our names to the deed. I want to know what kind of form to fill out and where to get it. Can we do it ourselves or should we hire an attorney to do it for us?

Cathy

Dear Cathy,

When people do their own estate planning it's very easy for them to make critical mistakes because they don't know the traps that await the unwary. If your two brothers sign and record a deed putting the property into the names of all five children as tenants in common (so that if you die your one-fifth passes by your will instead of going to the other four) then the county assessor will happily come over and reassess three-fifths of your father's home. The property tax bill would increase by thousands of dollars a year. If they sell the home and split up the money five ways, they will have to file a Federal Gift Tax Return (IRS Form 709), but that's less of a problem now that the Federal Gift and Estate Tax Unified Credit exempts $5,250,000 from gift and estate tax.

We never recommend that people prepare their own deeds, especially "simple" deeds to avoid probate instead of creating a revocable trust. Your father's home is his principal asset, or was since it's not in his name any longer. There are so many things that can go wrong with what he did. What if your two brothers change their minds and are not willing to divide the property five ways? What if one of them gets sued and a judgment lien is recorded against your father's home? What if there's something wrong with the deed that was prepared? What if they decide to throw their father out of his own home?

This simple deed your father signed could also cost your family tens of thousands of dollars in capital gains tax. If your father owns the property upon his death, it will be subject to federal estate tax. There will be no estate tax due because of the $5,250,000 exemption, but if the property is subject to estate tax it will get a step-up in its cost basis as a result of your father's death, allowing your family to sell the home after your father dies and pay no capital gains tax. But if your father doesn't own the home on his death, there's no step-up in cost basis, and a substantial amount of tax may be do when the property is sold.

The best way to fix this is for your brothers to give the home back to your father and for your father to create a revocable trust to avoid probate, or an irrevocable trust if he's on Medi-Cal benefits to shelter the home from Medi-Cal estate claims. If this isn't possible under the circumstances, your brothers can put all five children on the deed, but the deed should name all of you as joint tenants instead of tenants in common so you can avoid an immediate property tax reassessment.

Len & Rosie