People play lots of games to try and avoid probate. Most of the games end in a disaster for most of the players. Usually, it’s the government that ends up with the money and the last laugh. I’m trying to help you avoid these costs, but I would still rather see you pay the lawyer for probate than fork over even larger amounts to the IRS. Paying lawyers is a good idea – in my humble opinion.
Probate is the process of transferring wealth through death. If you transfer property at death, there will be a probate. Pretty much all of the games people play to avoid probate involve attempts to transfer property before death. But, Mom and Dad want to own their property and have all of the benefits of ownership while they are alive. So, how do you transfer property and not really transfer it?
One of the favorite games is called the “dresser drawer deed” transfer. Variations of the game go by the names vest pocket deed, pocket deed, Mary Jane deed, transfer on death deed, among others. Basically, Mom and Dad make out a deed to their property. They don’t give the deed to the kids. Instead, they put the deed in the dresser drawer. After Mom and Dad die, the deal is the kids go get the deed out of the dresser and record it.
Recording doesn’t make a deed valid. Recording only makes a record of the deed and puts the public on notice of the transfer. So, the fact that the deed isn’t recorded right away plays no part in the game. Do these delayed deeds work to avoid probate? Yes and no. If nobody ever challenges the transfer, they work. However, the title is always clouded if anyone ever discovers the truth about a dresser drawer deed.
Technically, the Deed is Not Valid
All the elements of the deed were not met. Because real estate is a “big deal,” the laws surrounding its transfer are very strict. The deed must have certain elements. The minimum elements are:
- The deed must be in writing.
- The grantor and grantee must be identified.
- The grantor must have “legal capacity” (of legal age, competent, etc.).
- The grantee must have the capacity to accept the transfer of the property.
- The property must be adequately described.
- There must be words of conveyance or transfer.
- The deed must be signed by the grantor.
- The deed must be delivered to the grantee or his agent.
- The deed must be accepted by the grantee.
All of the elements have to be met to have a valid deed. Which one of those elements isn’t present in a dresser drawer deed? Delivery – there was no delivery. Mom and/or Dad never delivered the deed. The kids went and got the deed out of the drawer after Mom and Dad were both dead.
Do the kids get away with the transfer by getting the deed and recording it. Yes, BUT, there are tons of expensive litigations over dresser drawer deeds.
The game ends in a tax disaster for the kids – every time. The kids get hit with an income tax when they go to sell the property. This tax can be avoided by taking advantage of the step-up in basis only available if they inherit it through probate or a trust. You choose: plan ahead by setting up a trust, pay a few thousand in probate, or pay tens of thousands in income taxes?
Of course, the amount of taxes depend upon how long Mom and Dad have held the property and how much it has appreciated. It is usually far better to have the property pass at death rather than use a dresser drawer deed. My video above explains this in detail. Check it out and make sure your family doesn’t make a mistake that can cost a lot of money.