Homeowner Legacy Planning

Homeowners may find themselves involved in legacy planning (estate planning) and having a basic understanding of real estate transfer options is a crucial part of preparing for the future. The process can vary depending on the specific ownership structure, and there are several methods by which property can transfer. In this post, I’ll discuss some of the most common options and potential advantages and disadvantages of each. Although I don’t give tax, legal, or financial advice, there are important considerations when transfering real estate and hopefully this will post can serve as a prompt to seek professional advice based on your specific needs.

1. Joint Tenants with Rights of Survivorship (JTWROS)

One of the most straightforward ways a property can pass to another person after death is through joint tenancy with rights of survivorship. When two or more people own property as joint tenants, each person has an equal share of the property. The key feature of joint tenancy is the "right of survivorship." This means that upon the death of one joint tenant, their share automatically passes to the surviving joint tenant(s) without the need for probate.

This arrangement is particularly common among married couples (more specifics for Indiana here), but it can be used by anyone. It's a seamless transfer of ownership, as the property doesn't have to go through the lengthy and often expensive probate process. However, it’s important to note that this type of ownership can have unintended consequences, especially if the surviving joint tenant isn’t the intended heir. For example, if you add a child or a relative to the title as a joint tenant, they automatically inherit your share upon your death, which might not align with your wishes if you haven't planned it carefully and even if they are intended to inherit the property, this scenario might have negative tax implications for the child.

2. Transfer on Death Deeds (TODD)

A relatively newer option available in many states is the Transfer on Death Deed (TODD). A TODD allows a property owner to designate a beneficiary who will inherit the property upon their death without the need for probate. The deed is revocable during the owner’s lifetime, and the transfer becomes effective only upon death. This method has gained popularity because it provides the simplicity of a beneficiary designation while still allowing the owner to maintain full control of the property during their lifetime.

One of the biggest benefits of a TODD is its simplicity and ability to bypass probate, reducing time and legal costs. However, it’s essential to ensure that the TODD is executed and recorded properly, or it may be invalid. Additionally, if there are multiple heirs, a TODD may inadvertently disinherit someone unless all parties are considered when setting it up. Finally, you’ll want to confirm with your financial / legal advisors, but a TODD should have a more positive tax treatment as comprare to transfering before death (ex: adding as a child / heir as joint tenant or quit claim).

3. Wills and Probate

For many homeowners, the traditional way of transferring property after death is through a will. If you own a property and want it to go to a specific person upon your death, you can include the property in your will. However, the estate will need to go through the probate process, which can be time-consuming, complex, and costly.

Probate is the legal process by which a court oversees the distribution of the deceased’s assets. The property in the will may be subject to debts, taxes, and claims from creditors. While a will provides clarity on who should receive the property, it doesn’t avoid the need for probate, which can take months or even years to complete, depending on the complexity of the estate.

4. Quitclaim Deed to a Family Member Before Death

Another common option is for a homeowner to transfer the property during their lifetime using a quitclaim deed to a family member. This can seem like an appealing choice because it avoids the probate process and can provide a sense of security to the family member who will inherit the home. However, there are some significant risks and disadvantages to consider before taking this route.

First, once you transfer the property, you lose ownership and control. This means you no longer have the ability to sell or mortgage the property without the consent of the new owner. Additionally, a quitclaim deed does not offer any protection if the new owner faces legal or financial trouble (such as bankruptcy or divorce).

Furthermore, if the transfer takes place before the homeowner's death, it may trigger gift taxes or cause problems if the property has appreciated significantly in value. The new owner may inherit the property with a higher tax basis, meaning they may owe more in capital gains taxes if they later sell the property.

5. Ownership of the property by a Living Trust

Another option is to create a revocable living trust (in some cases a non-revocable living trust) as part of an estate plan. Revocable trusts can be modified or revoked at any time. Typically, you'll name yourself as the "trustee" of your trust. This means that while you're alive, you retain control of the trust and its property. In your trust document, you'll also name a "successor trustee" to take over and manage the trust after you die; this person will distribute the property in the trust to your beneficiaries. Considerations around this option are well beyond the scope of this post and should be discussed with your tax, legal, or financial advisors.

Conclusion

There are multiple options for transferring real estate when planning a homeowner’s legacy, each with its own advantages and disadvantages. Joint tenancy with rights of survivorship and transfer on death deeds are great ways to ensure a smooth transfer without the need for probate. Wills are a traditional choice but come with the caveat of probate. A quitclaim deed before death might seem like an easy way to handle property transfer, but it has several potential pitfalls that can affect both you and your loved ones.

Before making any decisions, it’s always wise to consult with an estate planner, attorney, or tax professional to determine the best option for your unique situation. Planning ahead and understanding how these different methods of property transfer work can save your loved ones time, money, and stress when the time comes.