An important part of estate planning is figuring out what to do with your real property. “Real property”—also known as “real estate”—is land and anything permanently attached to the land, like houses, buildings, fences, or trees. Making a plan for what will happen to your real property can save your loved ones money and frustration after you die.
Here are some initial points to consider when making an estate plan for your real property.
Using a will is a simple and effective way to transfer real property to a new owner when you die. You simply include a brief description of the property in your will document and state who should get it when you die.
The downside to using a will to transfer real property is that everything that passes through your will goes through probate. Probate can be time consuming, expensive, and often unnecessary. And because real estate can be a person’s most expensive asset, it can be one of the most costly aspects to the probate process. Also, probate usually lasts for many months, and sometimes years. During that time, the new owners can’t transfer, refinance, or sell the property.
You can avoid these problems, by keeping your real property out of probate. But you have to plan ahead. You have a few options, including transferring your property though a living trust, transfer-on-death deed, or co-ownership.
Living trusts are a popular and effective way to transfer real property outside of probate. You make a living trust document that says who should get the property and who should be the trust’s “trustee” (which is you, until you die) and put the property into your living trust by changing its title document to show that the trust is the new owner. While you are still alive you still control the property and you can transfer it out of the trust at any time. When you die, the successor trustee you named will be able to transfer the property to your named beneficiary quickly, at little cost, and without probate.
Living trusts are more complicated and expensive to set up than a will, but the additional costs are usually well worth the money and headaches saved by keeping the property out of probate.
In an increasing number of states, you can keep your real property out of probate by using a “transfer-on-death” deed, sometimes called “beneficiary deed.” You use this type of deed in addition to your ownership deed. On it, you list the property and the beneficiaries who should get the property when you die. This type of deed does not affect ownership of the property during your lifetime, and you can change or revoke the deed anytime. After your death, your estate representative can transfer the property to the new owners quickly, at very little cost, and without probate.
You can also pass your real property without probate by jointly owning your property with the person who should own the property after you die. You must include survivorship language on the property’s ownership deed, and it will pass directly to the other owner when you die. However, with this method, your beneficiary has an ownership interest in the property while you're alive—you become co-owners. This can raise issues over control over the property, exposes the property to the creditors of your co-owner, and can also raise significant tax concerns.
To clear up a common misunderstanding, keeping property out of probate—using a living trust, transfer-on-death deed, co-ownership, or any other probate-avoidance device—does not affect your estate’s obligation to pay estate taxes. Your taxable estate will include any property that you own at your death, whether it goes through probate or not.
That said, most people do not need to worry about estate taxes. Federal estate taxes apply only to those estates worth more than $5.45 million (for deaths in 2016) and this amount rises each year with inflation. Needless to say, federal estate taxes only affect a very small fraction of estates.
However, if you live in a state that levies a state estate tax, you should look into your state’s exemption amount, because the estate exemptions tend to be the same or lower than the federal exemptions.
If you are one of the rare people who do need to worry about estate taxes, and you want to keep your real property out of your taxable estate, there are some ways to do this—like giving away your property during your lifetime, or transferring it to an irrevocable trust over which you have no control. See a lawyer to discuss your options.
To learn more about how you can keep your property out of probate, about how to save on taxes, or to get help with planning your estate, talk to a qualified estate planning lawyer.
