A Will does not constitute a full estate plan. Real property is the largest asset most individuals have. A Will by itself does almost nothing to safeguard your property from a long, costly trip through probate court. If you want to help your family deal with your passing, the protections that you establish with your real estate are just as important as the piece of paper that determines the recipient.
The Probate Problem With Real Property
If an individual passes away and their property is titled solely in their name, their heirs generally can’t do anything with that real estate until it goes through a court process called probate. Depending on local laws, this can take anywhere from a few months to a few years. And all while the court does its thing, the potential heirs are stuck in real estate limbo. They can’t sell the property. They can’t refinance the property. They might not even be able to get into the property. It just sits there.
A Last Will & Testament can say who ends up with the property. But the Will doesn’t control the property transfer. The Will tells the judge who the new owner is supposed to be. The court still has to sign off on it. Most people don’t realize just how little control a Will really gives them until the judge is telling them no.
If you think about it, the concept of willing property through a Last Will & Testament is pretty silly. Wills are public documents. So are property records. If a dad writes a Will leaving all his property to his daughter and specifically disinherits the other child, but they don’t like that and their dad knows they don’t like that, they could just say the dad signed the Will under duress or didn’t have the mental capacity to execute it. At that point, it’s on the daughter to prove he did. She’s got the burden of proof because she’s trying to take something from the other one. Instead of grieving her father, she’s stuck hiring a lawyer to fight with her sister over the family estate. It’s a mess. And yet, it’s the mess most people leave behind.
Transfer on Death Deeds: Simple and Reversible
A Transfer on Death Deed, or TODD, is a way to leave real estate without having it go through probate. When the property owner preparing the TODD passes away, ownership is transferred automatically by operation of law to the named beneficiary. The property never becomes part of the estate, which means it isn’t subject to the probate process nor the claims of any creditors of the estate.
Almost any real property, that is, land and buildings, can be transferred with a TODD. The exact form of deed will depend on the type of property and the specific laws of each state, but the effect is to leave the property to a beneficiary just as in a “regular” will.
The key advantages to a TODD are cost and avoiding the time and hassle of probate. The downside is you cannot fix any title or creditor problems that exist with the property at the time of the transfer, and the beneficiary has no rights in the property while the owner is still living. The process of comparing property deed types is where families either protect future liquidity or unknowingly create future legal headaches.
Lady Bird Deeds and Medicaid Protection
A Lady Bird deed, also known as an enhanced life estate deed, enables an individual to transfer property to others outside of probate while keeping a “life estate” in the property, the right not only to use the property for life, but also to sell any interest in the property during life or to name a different remainder beneficiary. It can easily be undone or modified without the need for the beneficiary’s consent.
The grantor of a Lady Bird deed retains all rights to the property while they’re alive. If they decide to sell, mortgage or rent out the property, they can do so without the future remainderman’s permission. The life tenant also continues to be responsible for property taxes, insurance, and upkeep. This can be seen as a benefit or a drawback, depending on circumstances. The grantor may want to retain complete control over the property and may not want the remainderman to have any liability or responsibility for the property. Or they might reasonably be concerned about the future remainderman interfering with their use and enjoyment of the property as a co-owner.
Choosing the Right Deed Matters More Than People Think
Deeds may seem trivial documents until you’ve seen old hand-drawn land plats, ancient family bibles with written land grants, or spent days in a distant courthouse tract book searching for the name of a long-lost ancestor along with the word grantee. Deeds, and title form, are at the very heart of what makes real estate transactions safe and predictable.
The Tax Dimension Heirs Often Miss
Something that’s usually missing amid all the talk about estate planning is this: The most promising way for your heirs to avoid a big capital-gains tax bill when they sell your property is for them to inherit it.
When heirs inherit property, they often receive a “step-up in basis” for tax purposes. That means the new “basis” for measuring their taxable gain or loss on the sale of the property is the property’s value on the date of the previous owner’s death, not the original purchase price.
Depending on how long the heirs hold onto the property after that, the tax bill on any gain during their ownership can be quite low, or even zero. That certainly isn’t the case if you give property to your kids, to your spouse or to anyone else during your lifetime.
Give it to them after you die and this tax-saving advantage is preserved.
