If you plan to pass your home on to a family member through your will, keep in mind that your loved one will likely need to go through the court process known as probate to properly transfer the real property into their name. Probate can be a costly process that may take months, even years in some cases, to complete, which is why many people seek to avoid it.
To help ensure that your loved ones do not have to deal with the probate process, one option you have is to use a deed to transfer your home that becomes effective only after you, as the owner of the home, pass away. However, be aware that using these deeds for probate avoidance can potentially introduce new issues.
Using a Deed to Transfer Real Property at Your Death
As a homeowner, you can create an estate plan to plan for what happens to your property, such as who receives it and how it’s used, after you pass away. For example, you may envision a loved one keeping the property in the family as a vacation destination for your loved ones to continue using after your death. Or, you might be planning to transfer a piece of property outright to a relative without putting any restrictions in place.
If you are hoping to avoid probate, there are multiple ways to transfer your home to someone. However, as the examples below show, they can also come with some disadvantages and limitations.
Life Estate Deed
A life estate deed gives you the right to live in and use your property throughout your lifetime. As the individual being granted the life estate, you are considered the life tenant. The person you name to receive the property after your death is referred to as the remainderman.
While a life estate avoids probate, it can have a few potential downsides. For example, the life tenant can only undo the life estate if the remainderman agrees. In addition, the life tenant and the remainderman may have different goals in mind for the property or may disagree over expenditures related to home improvements, major repairs, or maintenance. A life tenant cannot liquidate or sell the property without the remainderman’s agreement and is typically entitled to a portion of the proceeds based on their own life expectancy. This can cause problems for Medicaid eligibility and capital gains taxes.
Transfer-on-Death (TOD) Deed
A beneficiary deed, or TOD deed, automatically transfers the property at your death to the beneficiary you named. You can revoke the deed at any time while you are alive. However, this offers no asset protection from the cost of long term care.
The Downsides of Using a Deed
Your Beneficiaries Are Not Protected From Creditors
Property transferred by deed goes to the beneficiary outright, with no strings attached and no protections. The property may even be used to satisfy your loved one’s creditors because it is now considered their property.
Disabled Beneficiaries Also Lack Protection
If a beneficiary receives the property when unable to manage their affairs, its management falls to another person, such as a court-appointed guardian or an agent under a financial power of attorney. This person can do whatever they want with the property (as long as it is in the incapacitated beneficiary’s best interest).
Also, if the beneficiary receives any means-based assistance (e.g., Supplemental Security Income), the receipt of the property could potentially jeopardize those benefits.
You Won’t Be Protected If You Lose Capacity
The deeds outlined above are a sufficient way to transfer property after you are deceased. However, what if you suffer a serious injury or illness and lose the ability to manage your own affairs?
If you become unable to manage your affairs, the named beneficiary will not have the ability to help you manage the property because they will not have a current ownership interest in the property. This is because ownership does not transfer until your death. Your agent under a financial power of attorney (if you have one) or a court-appointed guardian will have to manage the property on your behalf.
Your Beneficiary Can Do What They Want
If you use a deed to transfer ownership at your death, your loved one will receive the property outright. You can’t add any additional conditions or requirements regarding the property or its use. Your loved one can sell or mortgage the home or decide to use it as a rental property. Ultimately, their intended use of the property may not align with your wishes.
Using a Trust to Transfer Your Real Property
Again, the loved one to whom you intend to pass your home may wish to sell it, rent it out, or renovate it. Perhaps you don’t have a preference as to what happens to the property once you are gone. However, if you are looking to set any restrictions or provide guidelines on how your loved ones will use your property, consider placing your home in a living trust. You can also leave the home to a beneficiary in a protective trust for your beneficiary.
The trust legally owns the property, with you as trustee and beneficiary during your lifetime. This allows you to stay in your home — and maintain control over it — while you are alive.
When you die, your home avoids probate because you do not technically own it. A successor trustee assumes legal responsibility for the property and manages and maintains it or transfers it according to your trust’s terms.
You can also use an irrevocable trust to not only avoid probate but protect the home from the cost of long term care through Medicaid asset protection planning.
Work With an Estate Planning Attorney
While a trust offers more flexibility and planning options than a deed, it may initially cost more to set up. Estate planning is a highly personal process that considers many factors. Every solution can present a unique set of benefits and drawbacks. You may be interested in avoiding probate, but that is usually just one estate planning consideration among many.
Determining the best way to transfer real property at death depends on both your preferences and circumstances. The estate planning attorneys at Kurre Schneps can help identify the best tools available to you to accomplish your goals and explain the benefits and potential risks.
