For most of us, our home is one of the most valuable assets we own, and we want to ensure that it is left to our loved ones in the most efficient and cost-effective way possible for them. For others, real estate has been a finely-tuned investment tool and we want to ensure that it goes to our heirs in the most advantageous way possible.
Regardless of whether your real estate is an investment vehicle or just the beloved family home that you are passing down to loved ones, how you own title and provide for leaving it to others can have an impact on you as the property owner as well as your beneficiaries when you are gone.
Leaving Real Estate in Your Will
Your last will and testament sets out how you want your assets to be distributed upon your death. You can leave real estate in your will, but there are pros and cons to doing this.
Any assets you are leaving in your will are subject to probate. This is the legal means by which the courts distribute your assets to your legal beneficiaries. The probate process can be costly and time-consuming.
When real estate is left in a will, the debt on it, i.e. any mortgages or liens, must be paid off immediately. This may or may not be financially feasible for your beneficiaries. Furthermore, if you have left the home to more than one individual, each of them owns an undivided interest in it.
When it comes to multiple family members, each may have their own ideas about how the property should be used, whether it should be sold, or are considering other financial or sentimental factors. Future capital gains need to also be considered when leaving real estate in a will and an appraisal should be completed to protect for this.
Leaving Real Estate in a Trust
Setting up a trust is another way that you can leave real estate to your heirs. A trust is a separate entity that can own real estate, which is then managed by a trustee. You can place real estate in a living trust and then act as the trustee to control and benefit from it during your lifetime. Then, upon your death, the property transfers to the beneficiaries of the trust.
One of the greatest benefits of transferring real estate through a trust instead of a will is that the real estate is owned by the trust, not you. Because of this, it is not considered part of your estate, and, consequently, is not subject to probate. Although any debt associated with the real estate still must be paid, it makes the process quicker and less expensive outside the probate process.
Although there still may be conflict if you leave real estate to multiple family members through a trust, this process will be overseen by your successor trustee who can make informed decisions about how the trust’s assets get distributed.
Leaving Real Estate Utilizing the Deed
How you hold ownership of your property and the way the property is deeded is another way of leaving real estate to your loved ones. The deed gives specific rights to its parties, both in how they own the property and, in some cases, at what point they take ownership of it.
In California, there are several ways to hold real property. These include sole ownership, community property, community property with the right of survivorship, tenants in common, joint tenants, and transfer-on-death.
Community Property
If you are married, any property you acquire during your marriage will be either community property or community property with the right of survivorship. In both cases, the property goes to the surviving spouse upon the other spouse’s death, each in a bit different way from the other.
Tenants in Common
Tenants in common is one way that multiple parties can own a piece of property. In this case, each party owns a share of the whole, which allows each owner to enjoy and benefit from the property while only officially owning a part of it.
Each owner is responsible for their portion of costs associated with the property, and each could conceivably sell their interest in the property to another party. If you own real estate under tenants in common, when you die, your interest will remain with your estate, enabling you to pass your portion of ownership on to your own beneficiaries.
Joint Tenancy
Joint tenancyis another form of ownership among multiple parties. This allows each owner the right to use and enjoy the property, the same as tenants in common. Upon the death of a joint tenant, however, the deceased party’s interest will go to the remaining joint tenants, with the last of the surviving joint owners owning the entire property. In the case of joint tenancy, upon your death, your interest is absorbed by the remaining joint owners and never becomes part of your estate.
Joint tenancy is a particularly favorable way to take title in order to pass property to other family members. But it’s important to keep in mind that a joint tenant can sell or transfer their interest. In this case, their share will be converted to a tenants in common share. And it can have tax consequences for those who are the surviving tenants to consider.
Another drawback of joint tenancy is that you, as a joint tenant, will not have full control over your home. For instance, if you choose to refinance your home to use equity, your other joint tenants could object. Your home is also subject to creditors of any of the other joint tenants. If another joint tenant is sued, a lien can be put on the property and impact the rest of the joint tenants.
Transfer-on-Death or Beneficiary Deeds
The transfer-on-death deed is a relatively new device for a property owner to transfer property to loved ones outside of probate. If you wish to leave a solely-owned property to someone upon your death, you can create a transfer-on-death or beneficiary deed.
A transfer-on-deed will only become valid upon your death and, throughout the time you own the property, you maintain the right to mortgage or even sell the property or revoke the deed entirely. In the case of a transfer-on-death deed, your beneficiary has no legal ownership until after you die.
There are certain limitations as they regard to transfer-on-death deeds:
- The types of properties that can be conveyed are limited to single-family homes or condominiums, single-family residences on 40 acres or less, or residences with no more than four residential units.
- The transfer-on-death deed must be signed and notarized to be valid.
- The transfer-on-death deed must be recorded within 60 days of execution.
- The beneficiary must file for a Change in Ownership Statement with 150 days of the death of the person transferring the property.
There are many benefits of a transfer-on-death or beneficiary deed, including its simplicity and probate and tax protections it affords while still giving you full ownership and revocation powers.
But there are some important drawbacks to consider. A transfer-on-death deed will prevent the sale, management, or borrowing against the property should you become incapacitated. While children may become beneficiaries, they cannot manage or sell the property until they turn 18 causing the court to appoint a custodian. Also, a transfer-on-death deed will leave your beneficiary liable for any unpaid debts as they regard the property. In addition, many title insurance companies are reluctant to issue a policy or properties that are transferred this way and require a three-year waiting period before it becomes insurable.
Life Estates and Remainder Interests
A life estate can be another useful way to give an interest in real estate to your beneficiaries. A life estate is a type of joint ownership where you can retain ownership rights during your lifetime, as the life tenant, with the remainder interests going to your beneficiary, called the remainderman, upon your death. Both parties have ownership rights of the property, but neither will have the right to sell or borrow against it during your lifetime unless you are both in agreement.
There are benefits and drawbacks to a life estate. A life estate avoids probate, enabling your beneficiary to take control immediately upon your death. It can also offer tax breaks for you and reduced capital gains for your beneficiary.
On the downside, a remainderman’s financial woes can affect you, as the life tenant, if a lawsuit or collection action causes a lien to be filed against the property. There may also be potential consequences for you should you need the assistance of Medicaid in the future.
Estate Planning Help
There is no one-size-fits-all approach to leaving real estate to your loved ones. Your situation is unique and the way the laws may affect you can be highly nuanced.
While there are pros and cons to each of these options, the good news is that estate planning can be tailored to your specific needs and circumstances. Getting the assistance of an experienced estate planning lawyer can ensure that your unique circumstances, goals, and wishes are considered when you are looking to leave real estate or any other assets to your heirs.
We’re here to help. To schedule a consultation, call Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton, the Tri-Valley and Bay Area at (925) 831-4840.