This article is meant to inform you several deed types used in Estate Planning. It reviews their most pertinent pros and cons.
Let’s examine some deed types used in estate planning – and compare and contrast the options:
Option 1- Do Nothing. Unfortunately, most adults don’t have their 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.
Option 2- Adding an owner to your home today. 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.
Option 3- Beneficiary Deeds, including Lady Bird Deeds. These types of deeds 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 capacity to act. This is generally far better than Option 2 above. Please note that only about 30 states allow for beneficiary deeds.
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.
Option 4- Deeding the Property to a Revocable Trust.
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.
Is the thought of saving a few hundred upfront starting to sound less appealing yet? It should be. If you have more questions on deed types in your state. Reach out to the attorneys at Encore for further information.