Angela is an Oklahoma nurse who ran
into financial trouble a couple years ago. She has two children, a dog, a
boyfriend, and debts that she can’t pay.
She is probably no more, nor less, perfect than you and I. Fortunately for Angela, her parents love her,
trust her, and expect Angela and her sister to inherit from them when they are
gone. Unfortunately for Angela, her
parents chose to use improper estate planning tools.
Most of
us who have had more than a couple of those birthdays that end in a zero, have
heard at least a little about inheritances and estates. We know that there are wills, trusts, deeds,
joint tenancy, probate and more. We have
heard horror stories about probate, and perhaps even about trusts. Unfortunately, some have heard that it is
easy and cheap to avoid probate by placing our property in joint tenancy with
our children. More unfortunately, some
have decided to use that tool without researching the risks that come with
it. I understand why. It sounds so easy and very cheap. Maybe your coffee shop buddy claimed that his
parents used a joint tenancy deed for their estate planning and everything went
just fine (and sometimes it does).
Perhaps Angela’s parents overheard such
a conversation at their coffee shop, drove over to the office supply store and
bought themselves a couple quit-claim deeds.
They then deeded their two rental properties into joint tenancy to
themselves and their two daughters. From
this action we can be reasonably certain that they never bothered to ask a good
attorney whether this was a good idea.
If they had asked an attorney with a some tax knowledge they might not
have done this because the income tax implications are punitive. Nor did they ask an attorney who had any
litigation experience, or that attorney would have shared that they were
opening up their property to all of the lawsuit risk caused by their daughter’s
driving habits and nursing career.
Apparently they didn’t ask a bankruptcy attorney whether their plan was
sound, because we know that daughter Angela sought bankruptcy protection from
her creditors after mom and dad deeded her into ownership of their property.
The bankruptcy judge accepted
evidence that mom and dad did not intend to give Angela a present interest in
the rental homes. The judge learned, and apparently believed, that mom and dad
paid all the taxes, paid for maintenance, claimed both the income and
depreciation from the properties, and in all ways treated those properties as
their own. That was not enough to allow mom
and dad to keep owning their properties.
The bankruptcy judge decided that
the bankruptcy trustee could sell both houses and use Angela’s ¼ interest to
pay her debts. The judge reasoned that
there are provisions and estate planning tools in Oklahoma law whereby the
parents could have successfully held their property and passed it on to their
children when the time was right (perhaps at death or incapacity), but the
parents did not choose to use those estate planning tools. They chose the wrong tool for the job, and
the judge ruled that they did so at their own peril.
Angela’s parents saved about $5500.00
in estate planning expenses, but it cost them about $43,000.00 in lost property
value and likely cost them tens of thousands of dollars in additional income
taxes. As you may have suspected, this is not a hypothetical case, this is an
actual case that happened right here in Oklahoma.
The moral of the story may be the
importance of using the right tool for the job; it may be, for some, the value
of research; but perhaps the thought to take away is that every decision is
likely to have a cost associated with it, and there is almost never an “easy
way out,” perhaps especially in estate planning. Do your research, seek out wise advice, and
use the right tool for the job. If you
don’t do all these, it will probably be too late to change when the plan is
exposed as a bad idea.
