4 WAYS TO LEAVE YOUR REAL ESTATE TO YOUR LOVED ONES (AND THE PROS AND CONS)
May 11, 2021
Owning real estate continues to be a very popular investment vehicle for individuals and couples alike. One attractive feature of investing in real estate is that investment property can also double as a personal residence. Whatever the case, it is important to understand that real estate can be owned in several ways, each of which has important legal consequences when it comes to leaving that real estate to your loved ones upon your death. Failing to understand how you legally own your real estate and how it will be passed on to your loved ones can lead to unintended, and often negative, consequences.
GIFTS AT DEATH
1. GIFTS IN YOUR WILL
Leaving real property to someone at your death can be accomplished through your last will and testament. Your attorneys Greg DuPont and Joe Johnson can help craft the proper language to direct that ownership to be transferred to your chosen beneficiary. This method is very straightforward and often initially less expensive than other methods. However, adding this kind of gift in a will requires the person in charge of your property when you die (your executor or personal representative) to submit your will to the probate court and secure the legal right to make the transfer according to the terms of your will. Probate can be expensive, time-consuming, and open to public view.
It is also important to ensure that the property’s recipient knows to have the real estate appraised as soon as possible after your death so that capital gains taxes can be properly calculated in case the property is later sold.
2. GIFTS FROM A TRUST
Many trusts are designed to serve as a substitute for a will by directing who among your loved ones should receive certain items of property at your death, including real estate. The trust document can specify who should receive your real estate. The trustee will then transfer the property to your designated recipient according to any directions you have included in the trust document. One of the primary benefits of a trust is that, as long as you transfer your property’s title to the trust before you die, the trustee will have all the necessary power to make the post death transfer to your intended beneficiaries. Probate will be unnecessary, saving your estate and trust beneficiaries significant costs and delays.
3. GIFTING REAL ESTATE TO MULTIPLE INDIVIDUALS
In some cases, you may want to transfer your real estate to more than one person at your death. For example, suppose you have a treasured family cabin that you and your adult children have all enjoyed for years. You may want to leave the cabin to the children in equal shares so they can continue enjoying it throughout their lives. It is crucial, however, that you carefully consider the various options for joint ownership before you decide how to pass it to them.
Tenancy in common is a frequently used option for joint ownership among individuals who are not related by marriage. This type of real estate ownership allows each joint owner to access and enjoy use of the entire property even though they may own only a fraction of it. However, if a joint owner dies, that person’s share will pass to their own heirs or beneficiaries rather than to the other joint owners. In the cabin example above, all the decedent’s children would have equal access and right to use the family cabin. They would also bear equal responsibility for maintaining the property and sharing in any liabilities associated with the property, such as property taxes. And ultimately, any co-owner could sell or pass on their share in the property in whatever way was in their own best interest.
Joint Tenancy is another form of joint ownership that, similar to tenancy in common, allows all joint owners the legal right to use and enjoy the entire property. Joint tenancy differs from tenancy in common primarily in that, when a joint tenant dies, that tenant’s interest in the property legally passes to the other joint tenants. In the cabin example, the siblings who inherited the cabin property as joint tenants could use and enjoy the property (and share in its maintenance and liabilities throughout their lives) but as soon as one of them dies, that person’s share of the property would pass to all the other joint owners, with the last joint owner to die receiving the entire property to gift or pass to anyone in any way. This situation may or may not be desirable, depending on your family dynamics. While it may be perfect for some situations, this right of survivorship can unfairly favor the youngest or naturally healthiest individual among the group of joint tenants.
It is also important to understand that a joint tenancy can be severed by any joint tenant through the sale or transfer of that individual’s joint interest without the consent of the other joint tenants, leading to confusion and animosity among the joint tenants if expectations are not clearly set and agreed to from the beginning.
4. LIFE ESTATES AND REMAINDER INTERESTS
A life estate is a less common, but potentially very useful, method of gifting an interest in a real estate property. This method is often implemented when the property is owned by a trust. However, a life estate can also be established by a properly drafted deed recorded in the local county records office. In either case, the legal document that creates the life estate specifies that an interest in the property has been transferred to a specific individual for life. Recipients of life estates have the legal right to use and enjoy the property as if it were their own throughout the remainder of their life. However, the donor of a life estate does not transfer all rights in the property.
For example, the recipient of a life estate typically has no right to sell, transfer, or borrow against the property, or determine to whom the property will pass upon the termination of the life estate. Those rights are reserved to the donor of the life estate. In many cases, the legal document that establishes the life estate (e.g., the trust document or the deed) will also name a third party to whom the remainder interest (the interest not included in the life estate) will pass when the recipient dies. If there is no named remainderman, the remainder interest typically reverts to the original owner.
A life estate can be very useful in a number of situations, including the following:
long-term care (when someone wants to qualify for Medicaid)
blended families (where one domestic partner or spouse wants to ensure that the other partner or spouse maintains enjoyment of the residence for life, with the remainder interest passing to the first partner’s or spouse’s children)
family farms (where one child wants to farm the land for life and the parents want the land to pass to other descendants upon the death of the child who does the farming)
The discussion above is only an introduction to the variety of methods that real estate can be transferred to and owned by individuals. With so many options available, transferring real estate to your loved ones isn’t a one-size-fits-all approach. You can create a highly customized method for passing on your valuable real estate in a way that best aligns with your individual and family circumstances and estate planning goals. While the variety of options available can be overwhelming at first, we are here to help you every step of the way. Give us a call to schedule your initial consult at (614) 389 – 9711.