Owning real property has always been a staple investment vehicle for people throughout history. One attractive feature of investing in real property is that it may also double as a Homestead. In other cases, real estate investments may be rental, commercial or recreational (i.e. your log cabin or private island).
Whatever the case may be, it is important to understand that real estate can be owned in several ways, each of which has important legal consequences when it comes to leaving it to your loved ones upon death. Failing to understand how you legally own your property and how it will be passed on to your loved ones can lead to unintended, and often unforeseen consequences.
Outright Gifts at Death
- Gifts In Your Will. Leaving real property to someone at your death can be accomplished via your Last Will and Testament. Your Estate Planning Attorney can help you create the proper testamentary language to direct that ownership of a certain parcel of property be transferred to your chosen loved one(s). This method is very straightforward and initially, often less expensive than other options. However, making this kind of gift in a Last Will and Testament usually requires the person in charge of your estate when you die (the “Personal Representative”) to submit your Last Will and Testament to the probate court and begin the probate process to transfer the asset pursuant to the terms of your Last Will and Testament. Probate can be expensive, public and time-consuming.
- Gifts from a Trust. Many Revocable Living Trusts are designed to serve as a substitute for a Last Will and Testament by directing who among your loved ones should receive certain items of property at your death, including real estate. The Trust, similar to a Will, can also distribute your real property to your loved one(s) pursuant to your wishes. However, the Trustee, instead of your Personal Representative will transfer the property to your designated recipient privately during the Trust Administration. One of the primary benefits of a Trust is that, as long as you transfer your property’s title to the Trust before you die, the Trustee will have the necessary power to make the post death transfer to your intended beneficiaries. Probate will be unnecessary, saving your estate and trust beneficiaries significant costs and delay.
- Gifts Using Enhanced Life Estate Deeds. A number of states have passed laws that allow property owners to record with the local land records office, a deed that transfers the title automatically (without the need of a probate court) to a named beneficiary at the death of the original land owner. This method for transferring real estate outright to the person whom you intend to receive it at your death can be very simple and cost-effective. Not every state allows this type of transfer, so it is important to check your state laws or consult with an attorney knowledgeable in this area before attempting to use such a tool. Florida has a unique type of deed, named the “Enhanced Life Estate Deed” (a/k/a “Lady Bird Deed”), which allows for this type of title transfer.
Gifting Real Estate to Multiple Individuals
In some cases, you may want to transfer your real property to more than one person at death. For example, suppose you have a treasured log cabin that you and your adult children have all enjoyed for years making wonderful memories; and you decide to consider adding them to the title of your property. You should consult with your Estate Planning or Real Estate attorney and go over the pros and cons of the way that title can be held.
- Tenancy in Common. This is frequently used as an option for joint ownership among people who are not related by marriage. This type of 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. Many times probates are needed on properties that were held as Tenants in Common by the co-owners. In the log 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. Also, any co-owner could sell or pass on their share in the property however they see fit.
- Joint Tenancy with Rights of Survivorship. This 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 joint tenants. In the cabin example, the siblings who inherited the cabin property as joint tenants 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 joint owners, with the last joint owner to die receiving the entire property to gift or pass to anyone in any way. While this may work well for some situations, it can unfairly favor the youngest or healthiest individual among the group of joint tenants.
- Tenancy by the Entirety. This is a form of joint ownership available only to married couples in Florida. 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, without the need of a probate. However, unlike joint tenancy, tenancy in the entirety prevents one of the joint owners from unilaterally severing the joint ownership. This can be beneficial because if a joint owner is sued, the tenancy by the entirety status will provide 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 under most cases, be prevented from foreclosing, as the other joint owner’s interest in the entire property cannot be involuntarily subjected to the individual creditors of the defendant joint owner.
- Life Estates and Remainder Interest. A life estate is a less-common (used more in planning for blended families where one spouse wants to ensure that the other spouse maintains enjoyment of the residence for life, with the remainder interest passing to the first partner’s or spouse’s children), but potentially useful, method of gifting an interest in real property. The life estate deed will specify that an interest in the property has been transferred to a specific individual for life. 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. However, the Grantor of a life estate does not transfer all rights in the property. For example, the recipient of a life estate typically has no right to sell, transfer, or borrow against the property, or determine to whom the property will pass upon the termination of the life estate. The life estate deed will name a third party to whom the remainder interest (the interest not included in the life estate) will pass when the Grantor dies.
The discussion above is only an introduction to the variety of methods that real property can be transferred to and owned by individuals. With so many options available, transferring real property to your loved ones does not have to be a one-size-fits-all approach. You can create an estate plan in a way that best aligns with your individual circumstances and goals with your Estate Planning attorney.
While the variety of options available can be overwhelming at first, we are here to help you every step of the way. I may be reached at email@example.com or by phone at 239-344-1358.