Ways to Leave Your Real Estate to Your Loved Ones (and the Pros and Cons)

Real estate can be owned in several ways, each carrying important legal consequences. Failing to understand how you legally own your real estate and how it will be passed on to your loved ones can lead to unintended, and often negative, consequences.

Outright Gifts at Death

Gifts In Your Will

You can leave real property to someone at your death through your will. Your attorney can help you create the proper testamentary language to direct that ownership of a certain parcel of property be transferred to your chosen beneficiary. This approach is relatively easy and inexpensive to set up, but turns out to be expensive and cumbersome in the long run. The probate process is required after your death to complete the transfer according to the terms of your will. Probate can be expensive, time-consuming, and open to public view.

It is also important to ensure that the property’s recipient knows to have the real estate appraised as soon as possible after your death so that capital gains taxes can be properly calculated in case the property is later sold.

Gifts from a Trust

Trusts can be designed to serve as a substitute for a will by directing who will be the beneficiary of your property and assets at your death. As long as you transfer title to your property and assets to your trust during your lifetime, your trustee will have the power and authority to transfer title to the beneficiaries listed in the trust after your death. Probate will be unnecessary, saving your estate and trust beneficiaries significant costs and delay. With the trust, you can also pass property to your beneficiaries with asset protection, divorce protection, and creditor protection included.

Gifts Using Transfer-on-Death or Beneficiary Deeds

Many states have laws that allow a real estate owner to record with the local land records office a deed that allows the real estate to be transferred automatically to a named beneficiary at the death of the original land owner. This method can be very simple and cost-effective. However, this type of transfer at death cannot protect the property from the new owner’s creditors. If asset protection for your loved one is an important factor, a transfer-on-death deed will not be a good solution. Typically, only a trust can provide its beneficiaries with protection against creditors.

Gifting Real Estate to Multiple Individuals

In some cases, you may want to transfer your real estate to more than one person at your death. For example, suppose you have a treasured family cabin that you and your adult children have all enjoyed for years. You may want to leave the cabin to the children in equal shares so they can continue enjoying it throughout their lives. It is crucial, however, that you carefully consider the various options for joint ownership before you decide how to pass it to them.

Tenancy in common is a frequently used option for joint ownership among individuals who are not related by marriage. This type of real estate ownership allows each joint owner to access and enjoy use of the entire property even though they may own only a fraction of it. However, if a joint owner dies, that person’s share will pass to their own heirs or beneficiaries rather than to the other joint owners. In the cabin example above, all the decedent’s children would have equal access and right to use the family cabin. They would also bear equal responsibility for maintaining the property and sharing in any liabilities associated with the property, such as property taxes. And ultimately, any co-owner could sell or pass on their share in the property in whatever way was in their own best interest.

Joint Tenancy with Rights of Survivorship is another form of joint ownership that, similar to tenancy in common, allows all joint owners the legal right to use and enjoy the entire property. Joint tenancy differs from tenancy in common primarily in that, when a joint tenant dies, that tenant’s interest in the property legally passes to the other surviving joint tenants. In the cabin example, the siblings who inherited the cabin property as joint tenants with rights of survivorship could use and enjoy the property (and share in its maintenance and liabilities throughout their lives), but as soon as one of them dies, that person’s share of the property would pass to all the other surviving joint owners, with the last joint owner to die receiving the entire property to gift or pass to anyone in any way. This situation may or may not be desirable, depending on the family dynamics. While it may be perfect for some situations, this right of survivorship can unfairly favor the youngest or naturally healthiest individual among the group of joint tenants.

Tenancy in the entirety is a special form of joint ownership available only to married couples in Michigan and some other states. Where it is available, it can be a very useful method of joint ownership. It is very similar to joint tenancy with rights of survivorship in that, upon the death of one joint owner, the other joint owner automatically receives ownership of the entire interest in the property. However, unlike joint tenancy, tenancy in the entirety prevents one of the joint owners from unilaterally severing the joint ownership. This feature can be particularly useful when one of the joint owners is sued, because tenancy by the entirety provides unique creditor protections to the other joint owner. When one of the joint owners is sued by a creditor attempting to foreclose on the property, the creditor will typically be prevented from foreclosing, because the other joint owner’s interest in the entire property cannot be involuntarily subjected to the creditors of the defendant joint owner.

Life Estates and Remainder Interests

A life estate is a less-common, but potentially very useful, method of gifting an interest in real estate. This method may be implemented through a trust or by deed. Recipients of life estates have the legal right to use and enjoy the property as if it were their own throughout the remainder of their life. The trust or deed then directs who will receive the remainder interest when the life estate holder dies.

A life estate can be very useful in a number of situations, including the following:

  • long-term care planning (when someone wants to qualify for Medicaid)
  • blended families (where one domestic partner or spouse wants to ensure that the other partner or spouse maintains enjoyment of the residence for life, with the remainder interest passing to the first partner’s or spouse’s children)
  • family farms (where one child wants to farm the land for life and the parents want the land to pass to other descendants upon the death of the child who does the farming)

The discussion above is only an introduction to the variety of methods by which real estate can owned and transferred. With so many options available, real estate ownership and transfer is not a one-size-fits-all approach. You should create a customized method for passing on your valuable real estate in a way that best aligns with your individual circumstances and estate planning goals. Let us help you with planning the method of ownership and transfer that works best for you. Give us a call today.