Estates of confusion Planning helps: Estate planning, done well, can ease things for all concerned.

February 18, 1996|By Adele Evans | Adele Evans,SPECIAL TO THE SUN

Attorney H. Mark Bobotek can tell more horror stories than H. P. Lovecraft -- when it comes to estate planning, that is.

Take one Frederick County couple he's advising. The wife's mother put her house in the wife's name, thinking she'd be

better assured of Medicaid benefits. Later, the couple bought a restaurant in Ocean City. It failed and they wound up owing $50,000.

"Guess where the money comes from? The mother's house," Mr. Bobotek said. "But Mom still lives in it. Mom will be evicted to pay the creditors. Everyone says it won't happen, but all they did was make a bad business decision."

That's just one of many traps of improper or hasty estate planning for the passage of real property. Planners warn that without proper, timely advice from financial planners, CPAs and lawyers, a will, living trust, deed or other method of passing on property can become a nightmare for the heirs.

Computer wills, though increasingly popular, can be equally dangerous.

"They're not people. They're not talking about a situation and may miss something," said University of Baltimore law professor Wendy Gerzog. "Customize it. You may spend $2,000 to $3,000, but those with larger estates will save a lot."

"Real estate isn't a no-brainer like gifting $10,000 a year," Mr. Bobotek said. "With real estate, there's always a balance of positives and negatives with any action. What works for one won't work for another."

In Maryland there are three basic types of ownership of real property, and each form can affect the taxes paid by the estate. Depending on the type of ownership, a will, trust or the law usually controls the property's disposition upon the owner's death.

"Tenancy by the entirety" is the first form, and the way most married couples own their homes. Under T by E, neither partner can sell or transfer the home without the other's consent, according to Jeffrey Gonya, attorney with the law firm of Venable, Baejter & Howard.

When one dies, the property passes by right of survivorship to the surviving spouse. No will is involved when the first spouse dies. The property passes to the surviving spouse under the law and is not considered a probated asset. Thus, even if a husband wills the home to his son, the wife inherits it, if she's alive at his death and they've owned the home T by E.

A related form of ownership is "Joint Tenants with Right of Survivorship." Many unmarried people take this option. It is similar to T by E, and very commonly done with bank or stock accounts; not so common with real estate.

The third way is totally different from the first two and called "Tenants in Common."

"It's like owning a share of stock, in that you own a separate share of the real estate," Mr. Gonya said.

Often under this arrangement, business partners buy real estate for, perhaps, 50 percent each. They can do what they will with the property. This kind of ownership passes down through a will, not the deed. Tenants in Common is common with siblings or unrelated investors.

A danger to this form of ownership is that outsiders can obtain shares in the property's ownership if one of the co-owners gets into financial trouble and has to relinquish the property to a creditor, for example. The original owners can wind up with a partner they don't want, and that part of the property could be sold again and again. If it's a major portion, that new owner could press his or her voting rights and severely complicate the property's financial future.

"And should an adult child die, it doesn't necessarily go back to the parent," Ms. Gerzog added.

Instead, the share of ownership could pass to the adult child's spouse, or child -- sparking further control issues.

Mr. Gonya remembers a case where the adult children were tenants in common. When the father was 75 and wanted to raise money to go to a nursing home through the sale of his home, he had a rude awakening. One son had died. The son's wife (whom the father disliked) was entitled to a share of the sale's proceeds. She refused to give the money back to her father-in-law.

Of course, you can also sell property outright. If you sell your home and are over 55, you can take advantage of a once-in-a-lifetime $125,000 exclusion on capital gains (for a husband and wife together). Of course, selling it doesn't reduce your estate per se, because the real estate has simply been converted to cash. Or, you might sell the home to your children at fair market value, specifying that the balance of the mortgage is to be forgiven at your death. The estate then would only include what hadn't been paid off.

Death triggers a number of tax scenarios, depending on what kind of estate planning was done.

Federal and state estate tax (usually lumped together for computing purposes) can take serious chunks of the estate, if the value of the gross estate tops $600,000. (That limit is expected to rise to $750,000 by 2001).

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