Recently, I’ve sat down with many different types of real estate professionals and many questions come up regarding estate planning and real property. But almost all of my conversations come back to avoiding probate (the theme of my website). So, for this month, I thought I would continue the conversation about non-probate transfers. Specifically, I wanted to talk about ways to transfer real estate outside of a will and avoid probate.
Many people take the approach of titling property between themselves and the later intended beneficiary. I rarely recommend this for several reasons. First, if there is a significant value increase of the property, the beneficiary will be liable for capital gains taxes on their initial portion when the property is sold. For example mom buys a house and puts daughter on the deed when she purchases it. Later the home has increased in value, mother passes and transfers her ½ interest to daughter. That ½ interest has a “stepped-up basis,” meaning that ½ will not be taken into account for capital gain taxes. Daughter then goes to sell the home and on the ½ she originally owned she must pay taxes. If daughter had received the whole property when her mother passed, the whole property would have the stepped-up basis and daughter would not be responsible for capital gain taxes.
Complicated, right? Well, there’s also a few other reasons, joint-titling is not the best estate plan. Putting the beneficiary on the deed entitles them to all the rights of ownership. Want to sell? Need their signature. Want to give the property to multiple children? Need their signature. You get the idea. Also, depending on the way the deed is structured (tenants in common versus joint tenants with right of survivorship), the other portion of the property may have to go through probate. Also, if only one beneficiary is listed and multiple are desired, the listed beneficiary has no legal obligation to share the property. And if they do choose to share the property, they will have to use their gift exemptions to gift the property. Finally, having another person’s name on the property opens it up to any liabilities they may have. They go bankrupt, that involves your home. They get sued, your home might be included in what is owed.
Instead, you can just gift all of the property now, right? Well, you’re still left with many of the problems. No stepped-up basis. Control of the real estate by the beneficiary. No obligation to share the property with other intended beneficiaries. Liability issues where the whole home could be taken while you’re still using it.
What do you do then? My preferred method for most families is to put the home in the trust. Avoids probate along with all the benefits of a trust. But even if you don’t have a trust, you can avoid probate through a beneficiary deed. A beneficiary deed simply places the beneficiaries on the property, so upon the owner’s passing, they normally only need to file an affidavit regarding the death. Compared to probate, a very easy option.
Unfortunately, this is the one area of non-probate transfers where you truly do need an attorney. The different options for titling and potential wording pitfalls make an attorney desirable. So, do you have real estate without a non-probate transfer? Give me a call.