Fred and Ethyl had three children, Mo, Larry, and Curley. They wanted to be sure the three kids inherited their home with as little cost and inconvenience as possible. A friend told them they had put their house in a trust for their benefit while living, then for the benefit of their children upon the demise of the second of them. Such an arrangement would get the house to the kids quickly and at minimal expense. That sounded pretty good to Fred and Ethyl, so they contacted their attorney to have a trust created. When the attorney told them how much it would cost, it didn’t seem like such a good idea after all. They asked the attorney what the cheapest option was. They were told they could sign a deed transferring title of the house to Mo, Larry, and Curley. The cost would be a small fraction of the trust option. But the attorney also said he would not recommend doing this as there were risks involved. The risks were explained to them, but they decided the cost savings outweighed the risks, so they signed a deed transferring title of their house to their three sons, as tenants in common in case any of the sons pre-deceased them.
Everything was fine for a few years. Then Mo and his wife developed marital problems which led to a filing for divorce. Mo and his wife had to file financial statements with the probate court. Mo did not list his interest in his parent’s home as an asset since, in his mind, the house was his parent’s not his. Mo’s wife knew about the transfer, however, and insisted Mo’s interest in the house be listed as an asset of Mo’s. The probate judge agreed and Mo’s one-third interest in the house, which was valued at $300,000.00 was added to Mo’s asset list. The divorce judgement reduced Mo’s share by $300,000.00. He was not happy. His wife (now ex-wife) was.
Larry’s marriage was secure. No divorce on the horizon. Larry was the brother who did almost everything right. He did not wait as long as his parents to create an estate plan. He and his wife signed wills leaving everything they owned to each other, then upon the death of the second, everything was to go to their children. They had three children who could be difficult at times. The one thing Larry did not do right was maintain his vehicles. He paid no attention to the puddle of fluid under one of his cars. Sadly, with all the brake fluid having leaked out, the car didn’t stop when he carelessly swerved into a tree driving home from a late-night party with his wife. They were both declared dead at the scene of the accident. Larry’s children had to probate his estate as well as their mother’s. Larry’s one-third interest in his parent’s house was part of his estate. His will left all his property to his three children in equal shares. Now the house was owned equally one-third by Mo, one-third by Curley and one-third by Larry’s three children. The three children wanted to get their inheritance and commenced a civil action to force the sale of the house. An expensive and emotionally draining experience.
Curley was the most laid back of the brothers. He was funny, likable and everyone’s best friend. But he was terrible with money. He was always in debt, always borrowing from anyone who was naïve enough to lend him money. Finally, it caught up with him. He had no choice but to declare bankruptcy, and he did! He had to include his interest in his parent’s home as an asset in his petition for bankruptcy. Now the bankruptcy court wanted to sell the house to help satisfy Curley’s numerous, and furious, creditors who no longer thought he was the funniest, most likeable friend they had.
So, however much Fred and Ethyl saved by not having a trust drafted cost the family dearly. Think twice about transferring your home, or any asset, outright to your children, or anyone else.