Estate Planning Options for the Home
As mentioned in our previous estate planning blog entry, there are many ways to achieve estate planning goals. A key estate planning goal of many is to allow their loved ones to avoid the “probate process.” The probate process is a court proceeding that transfers “probate” property from the name of the decedent to the name of the beneficiary – that is, the person who is receiving the property (most often a spouse or other close family member or friend). Property goes through the probate process if the decedent gave the property away through a will, or if the decedent passed away without officially stating what should happen with the property. Not only can the probate process become expensive, but it is also very time consuming.
So what are the best ways to avoid the probate process? A common way, which was discussed in our previous blog entry, is through a “revocable living trust” (usually just referred to as a trust). But while a trust is a very useful tool to avoid the probate process, it is not always the best tool. For instance, what if you want to simply ensure that your home does not go through the probate process?
A common way to transfer a home to a particular recipient is through a “deed of sale” coupled with what is called a “life estate.” A deed of sale is a document that conveys an ownership interest in the home to another person. The person receiving the deed is often the person a homeowner wishes to receive the home after the homeowner’s death. However, although the recipient of the deed of sale will have an ownership interest in the home, they do not have an immediate ownership interest. The deed of sale comes with a reservation of a “life estate” for the homeowner. A life estate gives the homeowner the right to stay in the house without interruption for as long as the homeowner lives. The homeowner would still pay necessary repair costs along with many other traditional homeowner expenses, but the home would not have to go through probate at the time of death. Instead, the property would simply go to the recipient of the deed of sale.
A good way to make sense of this process is to compare it to disposing of your home through your will. Let’s compare with two scenarios. In scenario one, you dispose of your home through your will. In this scenario, you remain in the home and pay necessary expenses until the time of death, and then the property transfers over to the beneficiary (commonly an adult child). In scenario two, you transfer the home via a deed of sale coupled with a life estate. In this scenario, you also remain in the home and pay necessary expenses until the time of death, and then the property transfers over to the recipient of the deed of sale. As you can see, the eventual result is identical in both scenarios, but there is a key difference. In scenario number one, the beneficiary of the home in the will must submit the will through the probate process, spend many months probating the will, and likely obtain legal counsel to assist with the process before receiving the home. In scenario number two, the recipient of the deed of sale simply takes title to the home without the need for the probate process.
This process has obvious appeal as an estate planning tool. However, how does it compare to another common estate planning tool, the trust? The trust is a great tool to avoid the probate process and maintain control of your property during your life. Therefore, whether this process is better for you than a trust depends on your estate planning goals. Do you simply wish to ensure your home avoids the probate process? Do you already have an estate plan for your other property? Do you know exactly who you want to receive your home after your death? If you answered yes to any of those questions, this process may be better for you than a trust. This process is also less expensive than creating a trust.
However, this process is not perfect for everyone. For instance, if you think you may wish to sell your home in the future then this may not be the perfect estate planning tool for you. There is also a strong possibility that you have a mortgage on your home, which may have an impact on whether this is the right estate planning tool for you. These are important details which greatly differ based on your situation.
No matter the estate planning tool, it is especially important to have an estate plan in place. We would love to meet with you to determine which estate planning tool is the best fit for your situation.