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 – Upon death, only the interest owned by the decedent gets a step up in basis.
Scenario 3 - Beneficiary Deed (Lady Bird Deed, Enhanced Life Estate Deed, Transfer on Death Instrument, Transfer-on-Death Deed)
A good option for those with specific circumstances warranting the necessity.
Beneficiary Deeds (they can be called Transfer on Death Deeds (TODDs), Transfer on Death Instruments (TODIs) or Lady Bird Deeds (depending on your state). This is an estate planning tool used to transfer real property upon the owner’s death without the need for probate. However, they differ in their specifics, legal implications, and availability depending on the jurisdiction. The functionality of these types of deeds are nearly identical.
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 approximately 30 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.
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 may be without any creditor or divorce protection.
In some states, it can be more difficult to stay Medicaid eligible.
The difference between 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 existing 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.
Although not required, it is good practice to name your trust as an "additional insured" on any homeowner insurance policy.
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.
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 and have equal ownership (unity of time and title). 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.
Community Property:
A form of ownership between married couples in the nine states that are community property states. Upon the first death, there is a full step up in basis for income tax purposes. This can also have a right of survivorship as state laws allow.
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.