Owning real estate continues to be a trendy investment vehicle for individuals and couples alike. One attractive feature of investing in real estate is that investment property can also double as a personal residence. In other cases, real estate investments may be rental, recreational, commercial, or farm properties. Whatever the case, it is essential to understand that one can own real estate in several ways. Each of these has significant legal consequences for how you leave that real estate to your loved ones upon your death. Failing to understand how you legally own your real estate and how you are thus transferring it to your loved ones can lead to unintended and often harmful consequences.
Leaving real estate to someone at your death can be accomplished through your last will and testament. Your attorney can help you create the proper testamentary language. With this, you can direct that a specific parcel of property ownership will transfer to your chosen beneficiary. This method is very straightforward and often less expensive than other methods. Gifting via a will requires the executor or personal representative to submit your will to the probate court. The executor will thus secure the legal right to make the transfer according to the terms of your will. Probate can be expensive, time-consuming, and open to public view.
It is also vital to ensure that the property’s recipient knows to have the real estate appraised. The appraisal should issue a report as soon as possible after your death. With the appraisal, the recipient can correctly calculate potential capital gains taxes if they want to sell the parcel.
Many attorneys design trusts to serve as a substitute for a will. The trust directs who among your loved ones should receive certain items of property at your death. The trust can include real estate. It can specify who should receive your real estate. The trustee will then transfer the property to your designated recipient according to any directions. One of the primary benefits of a trust is that, with proper titling, the trustee will have all the necessary power to make the post-death transfer to your intended beneficiaries. Probate will be unnecessary, saving your estate and trust beneficiaries high costs and delays.
Some states have passed laws allowing a real estate owner to record a deed with the local land records office. This enables the real estate to transfer automatically to a named beneficiary at the death of the original landowner. This method for transferring real estate at your death can be straightforward and cost-effective.
Not every state allows this type of transfer. So you should consult with an attorney knowledgeable in this area before using such a tool. Also, note that this type of transfer at death cannot protect the property from the new owner’s creditors. If asset protection for your loved one is essential, a transfer-on-death deed may not be the best solution. Typically, only a Trust can provide its beneficiaries with protection against creditors.
In some cases, you may want to leave your real estate to more than one person at your death. For example, suppose you have a treasured family cabin that you and your adult children enjoyed for years. You may want to leave the cabin to the children in equal shares. You would hope that they can continue enjoying it throughout their lives. However, you should carefully consider the various options for joint ownership before you decide how to pass it to them.
Tenancy in common is a frequently used option for joint ownership among individuals not related by marriage. This type of real estate ownership allows each joint owner to access and enjoy the use of the entire property. This is the case even though they may own only a fraction of it. However, when a joint owner dies, their share will pass to their heirs or beneficiaries. It will not pass automatically to the other joint owners. In the cabin example above, all the decedent’s children would have equal access and the right to use the family cabin. They would also bear equal responsibility for maintaining the property. They would also share any liabilities associated with the property, such as property taxes. And ultimately, any co-owner could sell or pass on their property share according to their best interest.
Joint Tenancy is another form of joint ownership. It is similar to tenancy in common because it allows all joint owners the legal right to use and enjoy the entire property. Joint tenancy differs from tenancy in common primarily because when a joint tenant dies, that tenant’s interest in the property legally passes to the other joint tenants. In the cabin example, the siblings who inherited the cabin property as joint tenants could use and enjoy the property (and share in its maintenance and liabilities) throughout their lives.
Still, as soon as one of them dies, that person’s share would pass to all the other joint owners. When the last joint owner dies, having received the entire property, they then have the right to gift or transfer it to anyone in any way. Depending on the family dynamics, this situation may or may not be desirable. While it may be perfect for some cases, this right of survivorship can unfairly favor the youngest or naturally healthiest individual among joint tenants.
It is also essential to understand that any joint tenant can sever a joint tenancy. They can sever it by selling or transferring that individual’s joint interest. They do not require the consent of the other joint tenants. This could lead to confusion and animosity among the joint tenants. It is, therefore, important to set and agree to expectations from the beginning. As you can see, a seemingly simple way to leave real estate can actually have complex results.
Tenancy in the entirety is a form of joint ownership available only to married couples, but it is not available in every state. However, where it is available, it can be a beneficial method of joint ownership. It is very similar to joint tenancy with rights of survivorship in that. Upon the death of one joint owner, the other joint owner automatically receives ownership of the entire interest in the property.
However, unlike joint tenancy, tenancy in the entirety prevents one of the joint owners from unilaterally severing the joint ownership. This feature can be handy when one of the joint owners faces a lawsuit because tenancy by the entirety provides unique creditor protections to the other joint owner. When a creditor sues one of the joint owners and attempts to foreclose on the property, the creditor will typically fail to succeed. This is because the creditor of the defendant joint owner cannot involuntarily impede the other joint owner’s interest in the use and enjoyment of the entire property.
A life estate is a less-common but potentially advantageous method you may consider to leave an interest in real estate. A trustee owner could implement this method. However, one could also establish a life estate by a properly drafted deed recorded in the local county records office. The legal document that creates the life estate specifies that interest in the property transfers to a specific individual for life. Recipients of life estates have the legal right to use and enjoy the property as if it were their own throughout the remainder of their life. However, the donor of a life estate does not transfer all rights in the property.
For example, the recipient of a life estate typically has no right to sell, transfer, or borrow against the property or determine to whom the property will pass upon the termination of the life estate. Those rights are reserved to the donor of the life estate. In many cases, the legal document that establishes the life estate (e.g., the trust document or the deed) will also name a third party to whom the remainder interest (the interest not included in the life estate) will pass when the recipient dies. If no named remainderman exists, the remainder interest typically reverts to the original owner.
A life estate can be beneficial in several situations, including the following:
The discussion above only introduces various methods by which real estate can be transferred to and owned by individuals. You can create a highly customized method to leave on your real estate to best align with your circumstances and estate planning goals. And while the variety of options available can be overwhelming at first, we are here to help you every step of the way. Book a call today!
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