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One Home, Three Deeds: Ways to Avoid Probate

Updated: Jul 5, 2023

In an earlier post, we discussed why avoiding probate is a good idea for most clients. Probate is a legal process that is used to transfer the ownership of property from a deceased person to their heirs. It can be a lengthy and expensive process, and it can delay the distribution of property to the heirs. It is also a very public process, requiring legal notices to be published in the paper along with public hearings.

While there are many ways to avoid probate on your real estate, this post will focus on three that can be prepared (in most cases) quite simply. Each of these can help to avoid probate by shrinking one's probate estate. At the end of the post, I will briefly touch on how each of these implicates Medicaid.

The Differences Between Transferring Real Estate by a Trust, by a Transfer-on-Death Deed, or by a Life Estate

When you own real estate, you have a few different options for how to transfer it to your beneficiaries after you die. You can transfer it through a trust, by a transfer-on-death deed, or by a life estate. Each of these methods has its own advantages and disadvantages. Here is a brief overview:

Transferring Real Estate Through a Trust.

A trust is a legal entity that can own property. When you transfer real estate to a trust, you are essentially transferring ownership of the property to the trust. The trust then holds the property for the benefit of your beneficiaries. When constructing a trust, you have many options including a revocable living trust.

There are many benefits to transferring real estate through a trust. One of the biggest benefits is that it puts a trustee in charge of shifting the asset to the designated beneficiary, which does not (in most cases) require court involvement. Another benefit of transferring real estate through a trust is that it gives you more control over how the property is managed after you die. You can specify in the trust who will be the trustee of the trust and who will be the beneficiaries of the trust, but you can also specify how the property should be managed and distributed. (This is great for people who have control issues or who have a complex family scenario.) Finally, the beneficiary might see more tax benefits when receiving property through a trust. (There are some rules and restrictions around this, which is a better question for your tax advisor. And thanks to a recent IRS opinion, homes held in irrevocable trusts no longer result in a stepped up basis.)

One drawback to putting your real estate in a trust is that if you owe a mortgage, it might require the lender to sign off on the change. This could require a new closing and closing costs. Another drawback is that it requires your successor trustee to know what they are doing! It requires significantly more planning than some other methods. You must be even more cautious about whom you put in charge of your affairs, as trusts often get a bad rap for being overly complicated. You might consider a professional trust administrator to overcome this problem.

Transferring Real Estate by a Transfer-on-Death Deed.

A transfer-on-death deed, also known as a TOD deed, is a type of deed that allows you to designate a beneficiary to receive your real estate when you die. The beneficiary does not receive ownership of the property until you die. Essentially, you craft a deed specifying that when you die, Party X is the new owner of the property. You record it with the Register of Deeds, and upon your death, Party X then files an affidavit along with your death certificate, becoming the new recorded owner.

Transfer-on-death deeds can be a good way to avoid probate, and they are entirely revocable as long as you remain alive. You can still sell or change the property during your life, because the beneficiary has no property interest at all until your death. They still receive a step-up in basis at your death, meaning they can likely sell the property without incurring significant capital gains. But, TOD's do not offer the same level of control as a trust. For example, you cannot specify in a transfer-on-death deed how the property should be managed after you die. You cannot control what another person does with the property. And, if you die owing money, the beneficiary is stuck dealing with the mortgage lender to square the loan.

Transferring Real Estate by a Life Estate.

A life estate is a type of ownership interest in real estate. When you create a life estate, you give one person--presumably you (the life tenant)--the right to use and enjoy the property for the rest of their life. After the life tenant dies, the property then passes to another person (the remainderman). Essentially, you would deed the property to your loved one and retain your own life estate.

Life estates can be a good way to transfer real estate to a loved one while still allowing you to retain some control over the property during your lifetime. You are free to make improvements, rent the property, or do anything that does not damage the remainderman's future interest. However, life estates can also be complex and may not be suitable for everyone. You would not be able to sell the property, and you are still responsible for taxes and insurance on the property during your life.

How Medicaid Figures In.

If your real estate is your largest asset and you do not have long-term care insurance, you could find yourself in need of Kansas Medicaid to help pay for your long-term care. You may have heard that the state will try to take your home to help pay for your care after you die, and this is often true. You should know that putting your house in a trust or using a TOD-deed is not necessarily, in itself, preventive to this occurring. In fact, the state may try to take the real estate from your beneficiary if (1) you transferred the property during the look-back period and (2) you do not have sufficient other assets to cover the amount owed.

If Medicaid will be a necessity for you--or if you are concerned it might be--it is important to disclose this to your attorney and discuss all the possible scenarios that could occur. People who are a bit younger--perhaps eligible for AARP membership, but not yet retired or experiencing serious medical concerns--should be able to confidently explore trusts or TOD's. People who are a bit closer to the end might want to consider a life estate or other devices. I cannot know the best course of action without a complete consultation and collaboration with a person's financial planning team.

If you are considering transferring real estate to your beneficiaries, it is important to speak with an attorney to discuss your options. An attorney can help you choose the best method for transferring your property and can ensure that your wishes are carried out after you die. Ultimately, the best method for transferring real estate will depend on your individual circumstances and goals. If you are unsure which method is right for you, call or email me to set up an estate planning consultation.

This post was created using assistance from Bard, an AI solution by Google.

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