Although estate planning isn’t the most romantic gesture, it is a way to show your loved ones you care about what will happen to them should something happen to you. For those who own real estate, there are a number of ways to own and plan for real estate to leave the property to your beneficiaries.
First is the traditional method, by will. An individual can leave property to beneficiaries in his or her will. If the will simply leaves property to beneficiaries and with no direction or need to sell the property in the estate, usually the will acts as the “deed” from the decedent to the beneficiaries. (If the owner has no will, a List of Heirs/Real Estate Affidavit is typically filed instead, which transfers title to his or her heirs at law.) For the owner, this is probably the simplest and least expensive approach. For the beneficiaries or heirs, it can be more expensive and time consuming. If the circuit court where the owner lived is backed up, it can take months to record a will. The cost of recording a will, where property passes by the will, will be higher as the property’s value is included in calculating the probate tax.
Second, the owner could execute a Transfer on Death Deed (or TOD Deed) to transfer title to his or her beneficiaries. Joint owners and married couples, who may own property as Tenants by the Entirety, may also execute a TOD Deed; both owners will need to sign. TOD Deeds take effect upon the owner’s death. Therefore, a will need not be recorded. Because a TOD Deed is often done in addition to a regular estate plan, the planning cost can be a bit more expensive than just using a will; however, a TOD Deed avoids the delay of waiting for a probate appointment and the additional probate tax on the property’s value. It can be an excellent approach for owners who have one beneficiary or whose beneficiaries will work well together as co-owners and whose beneficiary(ies) do not need additional protections that a trust approach could provide.
If the owner is concerned that multiple beneficiaries may not work well together to co-own, manage or possibly sell the property, he or she may want to consider a third approach—trust-based planning. In addition, trust-based planning can address concerns the owner may have about whether beneficiaries can handle inherited property, need creditor protection, are minors or have special needs. Revocable living trusts may be structured to allow one trustee to manage the property, protect the asset from beneficiary creditors and hold the property in trust for a minor or special needs beneficiary. Similar to a TOD Deed, properties are typically deeded, or retitled, into the trust, so that a will need not be recorded to transfer title upon the owner’s death.
Investment property owners may hold their real estate in a limited liability company (LLC). LLCs provide an excellent vehicle to limit liability and manage property during the owner’s life and after. It should be noted, however, that LLCs are considered personal property. The value of property owned in an LLC is considered in determining whether a probate estate must be formally administered, whereas property owned individually is not. Therefore, owning the LLC via a trust, or with a TOD designation on behalf of the member, is strongly recommended.
Lastly, some owners may consider owning property joint with survivorship rights (JWROS), or gifting property during life, either outright or with a life estate deed. In these cases, additional tax and control considerations arise that are beyond the scope of this column. The owner should discuss with his or her attorney whether the benefits of one of these approaches override the tax and control concerns.
Please note that comprehensive estate planning should address not only your assets, but also matters such as whom you would like to handle your financial and medical decisions in the event of your incapacity. This column has hopefully given a glimpse into a few of the planning options available for many families’ most important asset.
