This article informs you of several deed types for real property (your real estate) used in Estate Planning. It reviews their most pertinent pros and cons. Click the links below to jump to scenarios 3 and 4 and view the deed types Encore will assist with.
Deed Types from Worst to Best Case Scenario-
The worst-case scenario.
Something Encore can't help you with. A slightly better scenario than dying intestate but still less-than-ideal .
A good option for those with specific circumstances warranting the necessity.
THE BEST OPTION FOR MOST CLIENTS.
Scenario 1 - Do Nothing and Die Intestate.
The worst-case scenario.
Unfortunately, most adults have no estate planning documents and have done nothing to preserve their estates for future generations. As a result, the intestate estate will go through probate. The costs can be astonishing, and the process can be arduous.
Therefore, the do-nothing approach is rarely, if ever, the best-case scenario. Additionally, for those that have done estate planning in a do it yourself fashion, they often neglect this very important aspect of making sure their real estate is properly handled.
Scenario 2 - Adding an Additional Owner to Your Home.
Something Encore can't help you with. A slightly better scenario than dying intestate but still less-than-ideal.
This gives that person an ownership interest in your home today. This is generally not a good idea for several reasons:
You can no longer sell the home without your beneficiary’s permission as an additional owner.
If there is a mortgage on the home, the transfer may have just triggered your due on sale or acceleration clause, making the entire mortgage due today!
Your home is now subject to their creditors’ claims (including bankruptcy) and civil suits of that beneficiary.
Divorce – If your beneficiary gets divorced, there is a possibility that your home will be part of the asset split between your co-owner and their soon-to-be ex-spouse.
Loss of Step Up in Basis – If the donor dies and owns less than 100%, the people inheriting the property may have unnecessary capital gains if they sell the property after the death.
Scenario 3 - Beneficiary Deed (Lady Bird Deed, Enhanced Life Estate Deed, Transfer-on-Death Deed)
A good option for those with specific circumstances warranting the necessity.
All are similar to a Payable-On-Death (POD) or Transfer-On-Death (TOD) account designations that transfer banking and investment assets to a beneficiary upon your death. However, traditional PODs nor TODs can be used to transfer real property. Therefore some states have alternative beneficiary deed types to transfer real property (real estate).
The types of deeds Encore will assist with all avoid probate without giving the beneficiary any ownership until your death. You can also revoke a previously completed beneficiary deed if you change your mind and still have the capacity to act. This is generally far better than Option 2 above.
These types of deeds may not be a good idea in the following situations:
If your documents include restrictions on a beneficiary, that beneficiary will now get their interest in the property with no restrictions (think of a minor beneficiary or a beneficiary that is terrible with money);
If you have more than one beneficiary, you may have unintentionally made it more difficult to sell the property post-death because every beneficiary is now required to sign real estate documents.
When your beneficiaries do inherit, it is without any creditor or divorce protection.
In some states, it can be more difficult to stay Medicaid eligible.
The difference between these Beneficiary Deeds and a Life Estate Deed
The aforementioned deeds allow the property owner to retain full control over the property during their lifetime, including the ability to sell, mortgage, or refinance it without the consent of the beneficiaries/remaindermen. A life estate typically requires the beneficiaries'/remaindermen's agreement to make significant changes to the property during the life tenant's ownership.
Scenario 4 - Deed Transfer (Quitclaim or Warranty Deed) Transfer Ownership to Your Revocable Trust.
THE BEST OPTION FOR MOST CLIENTS.
You retain all rights as a homeowner;
It does not affect your ability to sell or transfer title to another party. You will want to make sure your checking account is also held in the name of the trust to ensure the proceeds are wired smoothly.
The trust owning the home will not affect your homestead exemption, property taxes, or mortgage.
It also ensures your heirs receive a full step-up in basis at the time of the trustor’s death.
Unlike other deed types, the property only needs one signature to be sold (assuming you have only named one trustee).
If structured properly, it also provides beneficiaries with protection from creditors, lawsuits, and divorce.
In some states, this type of trust shields assets held by the trust from being included in the Medicaid Recovery process.
Property Ownership Types
When researching a client's property on the local property appraiser's website, you may see the following ownership types listed within the property description.
Trust:
A three-party fiduciary relationship in which the first party (the trustor or settlor) transfers real property to the second party (the trustee) for the benefit of the third party (the beneficiary). The trustor and trustee may be the same individual. The uses of trusts are many and varied, for both personal and commercial reasons; trusts may provide benefits in estate planning and estate protection.
Tenants in Common:
A form of ownership between two or more owners who are not married to each other. Each owner has a specified interest in the property that may not necessarily be equal shares. However, the percentage of ownership of each tenant in common is usually specified in the deed.
Tenants by Entirety:
A form of ownership that can only be created between individuals who are married to each other at the time the property is acquired. Each spouse holds an equal and identical interest in the property as long as both spouses remain alive and married to each other. This treats both spouses as a single legal entity. Upon the passing of either spouse their interest passes to the surviving spouse.
Joint Tenants with Right of Survivorship:
A form of ownership between two or more people in which each person owns an undivided interest in the entire property. All joint tenants must take ownership at the same time. Since each joint tenant has the right of survivorship, when one passes away that joint tenant’s rights pass on to the remaining joint tenants.
Life Estate:
A legal arrangement whereby the beneficiary is allowed use of the property during life. At death, the property automatically transfers to a remainderman, who is the person who inherits the property.
Enhanced Life Estate:
Unlike a regular life estate, with an enhanced life estate the owner of the real estate retains complete control over the property during their lifetime, including the right to use the property for profit or to sell the property.