HOW TO PASS REAL ESTATE ON TO YOUR LOVED ONES

Gabriel Katzner - June 7, 2021 - Estate Planning
PASS REAL ESTATE ON TO YOUR LOVED ONES

Many people own real estate in the form of homes, businesses, or investments. In addition, to being a great investment, real estate can double as a personal residence. Investments can be rental, recreational, commercial, or farm properties. How you legally own your real estate has important legal implications on how you can pass real estate on to your loved ones at your death. If you are unsure how your real estate is owned or how it will be passed on at your death, the consequences may be unintended or even negative.

Passing Real Estate to an Individual

Passing on Real Estate as Gifts in Your Will

Gifts of real estate can be passed through your Last Will and Testament. Your will can be written to direct that ownership of a particular parcel of land be transferred to your beneficiary. The administrator of your will, also called the executor, will need to submit your will to probate court in order to secure the legal right to make the transfer. Using a will to transfer real estate is very straightforward and less expensive than other methods. However, probate courts can be expensive, time-consuming, and open to the public.

Your recipient will need to get the property appraised shortly after receipt. This valuation ensures that capital gains taxes on the property are calculated if the recipient wants to sell the property later.

Passing on Real Estate as Gifts from a Trust

If you transfer the property to the trust before your death, it will be owned by the trust. You would provide instructions to the trustee on how you want the property distributed in your trust document. Upon your death, the trustee would transfer ownership of the property to your recipient by following these instructions. A trust can serve as a substitute for passing real estate using a last Will and Testament. One major benefit is that, as long as you have transferred the property to the trust before your death, the trustee will have the power to make the transfer after your death without involving probate court. Since probate will be unnecessary, significant costs and delays can be saved for your loved ones and your estate.

Passing on Real Estate to a Beneficiary

Many states now make it possible to record  a deed with the local land records office that allows real estate to be automatically transferred to a named beneficiary at the original landowner’s death. If your state allows it, this method can be very simple and cost-effective. Since this process and its requirements vary by state, it is essential to seek the services of an attorney familiar with your state’s laws. This type of transfer on death cannot protect the real estate property from the new owner’s creditors. If asset protection for your loved one is a key consideration, then transfer-on-death may not be your best option. Typically, only a trust can provide its beneficiaries with protection from potential creditors.

Gifting Real Estate to a Group of People

Instead of passing the real estate to a single beneficiary, you may want to pass it to a group of people, such as a vacation home, to be shared by all of your children and their families. This situation requires careful consideration to ensure that the outcome is as expected.

Tenancy in Common

Tenancy in common is an option that is commonly used for joint ownership by individuals who are not related by marriage. This arrangement makes it possible for each individual owner to enjoy the whole property even though they only own a fraction of it. If one of the joint owners should die, their ownership will pass to their own heirs or beneficiaries, not to the other joint owner.

Along with ownership comes the responsibility for maintaining the property and sharing any liabilities associated with the property, such as property taxes. All owners equally share all responsibilities and costs. Ultimately, each co-owner could also sell or pass on their share in the property in a way that suits their best interests.

Joint Tenancy

Like tenancy in common, joint tenancy gives all joint owners the right to use and enjoy the entire property. Unlike tenancy in common, if a joint owner dies, their interest in the property legally passes to the other joint tenants. Let’s assume three siblings own a cabin as joint tenants in common. All three siblings can equally use and enjoy the property, and all three equally share responsibility for its maintenance and any liabilities it incurs throughout their lifetime. When one of the three joint tenants dies, their interest is divided amongst the remaining two. When a second joint tenant dies, the living sibling owns the property in its entirety and can pass it to their heirs and beneficiaries as they wish. When property owners use joint tendency in common, they must be aware that the scheme may unfairly benefit younger or more fit joint property owners.

Each of the three siblings in this example can sever joint tenancy by selling or transferring their interest in the property. This can be done without consulting the other joint owners, leading to confusion and animosity if it adversely affects the other two tenants especially if the plan was not discussed and agreed upon in advance.

Tenancy in the Entirety

Tenancy in the entirety is an option that is only available to married couples, and it is not available as an option in every state. It is very similar to joint tenancy with rights of survivorship in that upon the death of one owner. The other owner automatically receives ownership of the entire interest in the property. Unlike joint tenancy, one owner in tenancy in the entirety cannot unilaterally sever the joint ownership.

The inability to unilaterally sever the joint tenancy is useful when one of the joint owners is sued because tenancy by the entirety provides unique creditor protection to the other joint owner. For example, if one joint tenant has a creditor who is attempting to foreclose the property to pay the creditor, the creditor will typically be unable to do so. Allowing one owners’ creditors to foreclose a property would involuntarily subject the other owner to the creditors of the defendant joint owner.

Gifting Real Estate as a Life Estate

A life estate is a unique way to transfer the use of a property for life. The donor gives the recipient the legal right to use and enjoy the property as if it were their own throughout their lifetime. However, the donor does not transfer all rights to the property. Life estates are often used when a trust owns the property. However, they can also be established by a properly drafted deed recorded in the local county records office.

Typically, the recipient of a life estate has no right to sell, transfer, or borrow against the property. They also have no right to determine who will receive the property upon the termination of the life estate. The donor of the life estate reserves these rights. The trust document or the deed that legally established the life estate will commonly name a third party who is the remainder interest in the property. This person will assume ownership of the property when the recipient dies. If there is no remainderman named, then the remainder interest typically reverts to the original owner.

You may consider a life estate in the following circumstances:

  • Long-term care (when someone wants to qualify for Medicaid)
  • Blended families (when the original owner wants their new spouse to enjoy the property for their lifetime with the remainder interest passing to the first partner’s children)
  • Family farms (when one child will farm the land throughout their lifetime, but upon their death, the owners want the land to pass to other descendants)

There are just a few of the many ways to pass real estate on to your loved ones. These options give families many choices when designing an arrangement that works best for their individual family situation. We are happy to meet with you to discuss some of these options, point out the risks and benefits of each, and help you come to a decision that works for your family.

You can schedule a call with us or reach us directly at 855.356.0573 to learn more about how best to plan today to protect those most important to you.



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