"The way in which real property is titled will affect how it is transferred during the administration of an estate after death," says Jeff Witz, CFP.
Owning a home or purchasing an investment property are common goals for physicians, as real property can be a useful tool to build wealth for themselves and their heirs. There are many ways to hold title to real property, which is defined as land and anything built on it. However, the way in which real property is titled will affect how it is transferred during the administration of an estate after death, so understanding the differences is important.
Subject to the terminology of each state, most private residences are owned by one of the following:
- sole owners;
- tenants by the entirety (a married couple owns property with each spouse passing it to the surviving spouse);
- joint owners with rights of survivorship (the property is owned with another person and either party will inherit the other party’s share);
- revocable living trust (1 or more persons can own the trust);
- an entity such as a corporation, LLC, or partnership; and
- tenants in common (an individual owns property with another person, but the heirs of each party inherit their own share).
Each ownership method must be dealt with during the estate administration process. You need to make sure you own real estate in a way that will fulfill your wishes upon death and at the same time, streamline the process of transferring ownership of the property. Certain ownership methods can result in probate, which is a court-supervised procedure of administering a deceased person’s estate. Probate can be a long and public process, and many families prefer to keep their affairs private. Estate planning techniques to avoid probate depend on how you choose to hold title to the property, but sometimes probate is unavoidable.
Sole ownership is when a property is titled in one individual’s name. That individual owns 100% of the property, with title being transferred during the probate process by direction of a will after their death. If no will was created, title will be transferred based on the decedent’s state of residency’s intestate succession laws. With sole ownership, probate cannot be avoided.
The most common way to avoid probate if you are married is to own property as tenants by the entirety. If the property is owned together, it passes to the surviving spouse outside the probate process, avoiding delays.
Another method to avoid probate is for 2 individuals (who do not need to be married) to own the real property jointly with rights of survivorship. However, you must be careful that this option meets your wishes because you may not want the other owner to inherit your share of the property. At the death of 1 owner, the other owner becomes 100% owner of the property. If the goal is to pass ownership of the property to someone else, this form of ownership may not be appropriate.
An additional way to own real property that avoids probate is with a revocable living trust. The benefit of the trust holding title to the real estate is that you can have the trust document specifically address who will inherit the property without needing to probate the property. If a property you own has a mortgage and you want to place it in a trust, there are additional considerations. You must review the mortgage agreement and, in most cases, get preapproval of the transfer of property. Generally, mortgage companies permit the transfer to a revocable trust.
Some owners of real property want to avoid personal liability, especially if they own commercial or rental property. These owners typically create a corporation or a limited liability company to own the real property. This provides some protection from being personally responsible for the debts or liabilities of the entity. At the time of death, these shares or membership interests in the corporation or LLC pass through the individual’s estate through the probate process. In the individual’s will, the testator (the person whose will it is) can designate who will inherit the share of the corporation or allow it to pass to the residual estate.
Holding title as tenants in common will result in the property going through probate as well. Holding title to property as tenants in common sometimes results in contention with the other owner and the individuals who will inherit your share or the other party’s share. It is best to discuss these issues with the other owner and the heirs to help alleviate any tension that may occur with new ownership of the real property. Consult your estate planning adviser about the best way to title your real property so that you have an estate plan that best meets your wishes and streamlines the transfer process upon your death.
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