As people seek out ways to avoid the expense and delays that may be associated with probate administration, they may latch onto some “creative” methods for accomplishing this goal. One such method is a technique often called a “vest pocket deed,” or just “pocket deed,” and while it may seem extremely advantageous in terms of both avoiding probate and maintaining total control during one’s lifetime, it is actually filled with serious risks.
A pocket deed is a colloquial term referring to a deed that the property owner executes during their lifetime, but keeps in their figurative (or, in some cases, literal) vest pocket until death, and only after which is the deed recorded with the Register of Deeds. The intent behind such a method is usually two-fold. One, the method will avoid probate, because the owner signed the deed transferring the property within his/her lifetime, the property legally was not part of that person’s estate at the time of death, meaning that property was not subject to probate administration.
Two, the method offers the original owner total control, because no one recorded the deed, the relevant public records continued to show the original owner as the current one, and they could continue to manage and control the property as if the deed did not exist. If the owner changed his mind regarding any aspect of the transfer, he could simply destroy the deed and nullify the transfer.
The method contains may potential dangers, however:
• Your continued control may not be guaranteed. If someone discovers and records the deed, then the transfer becomes effective immediately and the person to whom you transferred the property becomes the record owner of the property, and may chose to sell the property, mortgage the property, or evict you.
• The pocket deed may cause problem for your loved ones. A possibility exists that the potentially long gap in time between execution, delivery and recordation may create a cloud on the title on the property. That means that title insurance companies may not write insurance for the property which, in turn, makes your transferee’s title to the property not marketable unless they engages in a legal proceeding to clear up the cloud on the title.
• The pocket deed may cost your loved ones money. If the person to whom you leave the property ultimately sells it, they will pay more in taxes as a result of the pocket deed. The pocket deed means the transfer was legally one that occurred during your lifetime, not upon your death. As a result, your transferees will not receive a full “step up” in tax basis when they receive the property, which in turn, means that the amount of capital gains taxes they will owe upon the sale of the property will be higher than if they had legally received the property at the time of your death.
Fortunately, in Wisconsin, there is a way to get the advantages of a pocket deed: namely, continued control during your lifetime and probate avoidance, without the risks of clouds on titles or higher tax bills. It is the transfer on death (TOD) deed. This deed is a recorded legal instrument naming who will receive your property upon your death. You will maintain control over your property for the rest of your life, and you maintain the authority to change or revoke the TOD deed. Meanwhile, your transferees receive a full stepped-up tax basis when they receive the property.
Wisconsin law now provides many means to allow people planning their estates to avoid probate without resorting to convoluted and legally risky tools like pocket deeds. To discuss which techniques best suit your needs, consult the attorney’s at Estate Law Partners, LLC. They have a long track record of providing clients with personalized advice and effective plans, and would welcome the opportunity to help you put your plan together. Request a consultation to discuss your plan today.