Do Unrecorded Deeds Help or Hurt Estate Planning?

Using an unrecorded deed to transfer property without probate sounds like an easy way to transfer ownership of the family home, but is it asking for trouble? That’s the topic of an article from NWI Times entitled, “Estate Planning: Are unrecorded deeds a good idea?” The fact that the idea came from a family’s attorney makes the question even more important. The attorney told the parents the children could record the deed after their deaths and transfer the property without probate.

Most estate planning attorneys haven’t seen this technique used in a long time, and some may never have heard of it. There’s probably a good reason for this—it’s an estate mess waiting to happen.

First of all, what if the deed itself goes missing? One of the most common questions estate planning attorneys hear is “What do I do because Mom lost the_____?” Fill in the blanks—the deed, the title to the car, the bank statement, etc. Important documents often get lost. If a deed is missing and can’t be recorded, title can’t be transferred. Hoping an important piece of paper doesn’t get lost is not an estate plan.

Until the deed is recorded, and title transferred, the holders of the title still own the property. They can mortgage the property or sell it. The plan for the children to receive and record the deed may not have legal authority.

Laws about how deeds must be created change. Indiana made a change to the law in 2020 that required signatures on deeds to be witnessed. Without the witness, the deeds can’t be recorded. If the adult child is holding a deed for the recording and it’s not witnessed because the parents have died, it can’t be recorded.

There are better ways to transfer ownership of the family home that adhere to the general principles of estate planning.

There are also different types of deeds that are more commonly used in estate planning to transfer home ownership without going through probate. One is a Transfer on Death Deed (TOD Deeds). A TOD deed allows a person to name beneficiaries on their real estate property without giving up any rights of ownership. The TOD deed is recorded, so there’s no worry about mom or pop losing the paperwork.  The TOD deed can also be changed by recording another deed or using an affidavit.

Trusts can also be used to transfer home ownership and keep the transaction out of probate. An estate planning attorney will be able to explain the different types of trusts used to transfer a home. State laws vary, and allowable trusts vary, so talking with a local estate planning attorney is the best option.

Reference: NWI Times (May23, 2021) “Estate Planning: Are unrecorded deeds a good idea?”

 

What Is the Main Purpose of a Trust?

There are advantages and disadvantages of an irrevocable trust, and you’ll want to be fully informed before taking steps that may be costly to undo, explains the article “Understanding your trust” from The Sentinel. Once your home is deeded to an irrevocable trust, you won’t be able to make any changes without getting permission from the beneficiary or beneficiaries named in the trust. Your rights of ownership are transferred to the trust, when you deed it to the trust.

A separate legal agreement with the trustee, the person in charge of the trust, will be needed to give you a legal right to occupy the home also. Any changes could be made but will take time and could be costly. Changes can also only be made, if the beneficiaries agree.

There was a time when lenders inserted clauses into mortgages that any time a sale or transfer of the deed occurred, full payment of the mortgage would be due. This changed, and today the mortgage is not due just because of a change in the deed. However, it may be a challenge to refinance if the home is held in an irrevocable trust.

For most people, the reason to put a home into an irrevocable trust is to prevent the home from being lost to a creditor, including protecting the home’s equity from the cost of nursing home care, during life or after death. In some states, like Pennsylvania, the state will initiate a collection action against the estate to recover the amount paid for the deceased homeowner’s nursing care costs.

The move to put a home into an irrevocable trust can work as long as the trust remains intact and the homeowner does not apply for financial assistance for nursing home care for at least five years from the date that the deed was transferred as recorded in the courthouse.  If long-term care needs arise before that time, putting the home into an irrevocable trust may not serve its intended purpose.

There are some tax benefits from an irrevocable trust. If the homeowner lives at least one year after the home is deeded to the trust, in some states no inheritance taxes will be due on the home. Check with a local estate planning attorney to learn what the rules are in your state.

If the trust is prepared by an experienced elder law attorney, it is likely that the capital gain on the sale of the home by the trust after the homeowner’s death will be taxed based on the home’s value at the time of sale, rather than the value at the time it is placed into the trust or on the day of death.

If the home is the only asset in the trust, the taxpayer ID of the trust will be the homeowner’s Social Security number, and no annual tax return is required. If, however, other assets, particularly income-producing assets, are placed in the trust, then the trust needs to have its own EIN (a federal tax identification number) and annual tax returns will need to be paid. Taxes on a trust are normally at a higher rate than individual income rates.

Your estate planning attorney will explain the numerous strategies that can be used to protect your assets and your home from the high cost of long-term care. There are many Medicaid compliant techniques and tools, depending upon the situation of the individual and the family.

Reference: The Sentinel (April 23, 2021) “Understanding your trust”

 

How Does Home Ownership Transfer after a Parent Dies?

The first thing you’ll need to know about selling a home after the death of a parent, is how your parents held title, or owned, the home, begins the recent article “Home ownership after the death of a spouse” from nwi.com. In most cases, the home is owned by a couple as “joint tenants with rights of survivorship” or as “tenants by the entirety.” The latter is less common.

Tenancy by the entirety is a form of ownership available only to married people in a limited number of states and offers several advantages to the owners. It creates an ownership interest where the spouses own property jointly and not as individuals. It also creates the rights of survivorship, so that the surviving spouse owns the property by law when the first spouse dies.

Joint tenancy with rights of survivorship is similar to tenants by the entirety, in that they both convey rights of survivorship. However, joint tenancy does not treat the owners as a single unit. If you own entireties property with a spouse, you may not transfer your interest without your spouse’s permission because you own it as a unit.

In joint tenants, if one of the tenants want to transfer their interest in the property, he or she may do so at any time—and do not need the permission of the other tenant. This has led to some sticky situations, which is why tenants by the entirety is preferred in many situations.

If your parents own their home as tenants by the entireties or as joint tenants with rights of survivorship, the surviving spouse owns the home as a matter of law, and legally, ownership begins at the moment that first spouse dies.

Different states record this change of ownership differently, so you’ll need to speak with an estate planning attorney in your community (or the state where your parents lived, if it was different than where you live).

To notify the recorder’s office of the death, some state laws require the submission of a surviving spouse affidavit, which puts the recorder and the community on notice that one of the owners has died and the survivor now owns the home individually. Here again, an estate planning attorney will know the laws that apply in your situation.

There was a time when people recorded a death certificate, but this does not occur often. The affidavit makes a number of recitals that are important, and the recorded document proves the change of title.  In most cases, there is no need for a new deed, since the surviving spouse owns the property at the time of death, and the affidavit itself demonstrates proof of the transfer of title in lieu of a deed.

Reference: nwi.com (March 14, 2021) “Home ownership after the death of a spouse”

Suggested Key Terms: Home Ownership, Surviving Spouse, Affidavit, Title, Tenants by the Entirety, Rights of Survivorship, Joint Tenancy, Estate Planning Attorney, Transfer, Death Certificate, Deed,

Am I Too Young to Remain in House Inherited from Mom?

Can the house be listed to the deceased on a deed forever? What if the deceased was 70 years old and living in a 55-and-over community with his 40-year-old son?

Her will left everything, including the house, to her adult son. The son is now wondering if and for how long he can stay in his home in the senior community. Can he stay put, or will he have to sell the house and move?

lehighvalleyhigh.com recently published an article entitled “Can son remain in 55-and-over community after parent dies?” The article explains that the deceased individual’s name can stay on the deed indefinitely. However, when the mother dies, the property passes “by operation of law,” regardless of what the deed says.

For example, if the deed was titled as husband and wife, the surviving spouse would become the sole owner by operation of law at the death of the first spouse, no matter if there was a new deed filed.

Another important issue with this scenario involves the details in the by-laws of the 55-and over community.

It would be rare that the 40-year-old son could stay in the home in the 55-and-over senior community.

It is doubtful that the decedent owned the right to convey his/her property interest to a non-senior.

In addition, the mother’s will also should be reviewed thoroughly to determine whether the will leaves the residuary estate to the son, or if it specifically leaves the home to the son.

If the son inherits the residuary estate, then the home will be liquidated, and the proceeds are inherited by the son. If the mom’s will specifically leaves the home to the son, the bequest will most likely fail. In that case, the home would be liquidated, and the proceeds would pass as part of the residuary estate.

Finally, there’s also a good chance that the son may not have been living there with the approval of the by-laws, but there could be an exception to the by-laws for someone who is disabled. Speak with your estate planning attorney if you have questions or concerns.

Reference: lehighvalleyhigh.com (Jan. 13, 2020) “Can son remain in 55-and-over community after parent dies?”

What Happens If a Spouse Is Not on the Deed?

When one spouse has paid for or inherited the family home and the other spouse has not contributed to its purchase or upkeep, the spouse who purchased the home has to take proactive steps. Otherwise, the other spouse will inherit the home and have the right to live in it, lease it, visit once a year or do whatever he or she wishes to.

It’s their home, says a recent article from the Houston Chronicle titled “Navigating inheritance when husband is not on the deed,” and remains so, until they die or abandon the property.

In this case, the woman is the buyer of the home and she wants her son to have the house. The son will eventually own the home, but as long as the husband is alive, the son can’t take possession of the home or use it, unless given permission to do so by the husband.

The husband may remarry, and if so, he and his new wife may live in the home. If she dies before he does, according to Texas’ homesteading laws, the homestead rights don’t transfer to her. At that point, the son would inherit the home and the new wife would have to move out.

The husband doesn’t get to live in the house for free. He is responsible for paying property taxes and maintaining the house. If there is a mortgage, he must pay the interest on the mortgage, but the woman’s son would have to make principal payments. The son would also have to pay for the homeowner’s insurance.

However, there are options:

  • Move to another state, where the laws are more in the woman’s favor.
  • Sell the home.
  • Ask the husband to sign a post-nuptial agreement, where he waives his homestead right.
  • Get divorced.
  • Gift or sell the home to the son now and rent from him.

The last option is risky. If the son owns the home, there is no protection from the son’s creditor’s claims, if any, and the woman would lose her property tax homestead exemptions. If the son needs to declare bankruptcy or sell the home, or dies before his mother, there would be nothing she could do. If the son married, his wife would be an owner of the home. He (or she) could even force his mother out of the home.

Speak with an estate planning lawyer to see if gifting the house to your son is a good idea for your situation.

Reference: Houston Chronicle (Nov. 13, 2019) “Navigating inheritance when husband is not on the deed”

Do It Yourself Wills Go Wrong–Fast

What happens when a well-meaning person decides to create a will, after reading information from various sources on the internet? There’s no end of problems, as described in the Glen Rose Reporter’s article “Do-it-yourself estate plan goes awry.”

The woman started her plan by deeding her home to her three children retaining a life estate for herself.

By doing so, she has eliminated the possibility of either selling the house or taking out a reverse mortgage on the home, if she ever needs to tap its equity.

Since she is neither an estate planning attorney nor an accountant, she missed the tax issue completely.

By deeding the house, the transfer has caused a taxable transaction. Therefore, she needs to file a gift tax return because of it. At the same time, her life estate diminishes the value of the gift, and her estate is not large enough to require her to actually pay any tax.

She was puzzled to learn this, since there wasn’t any tax when her husband died and left his share of the house to her. That’s because the transfer of community property between spouses is not a taxable event.

However, that wasn’t the only tax issue to consider. When the house passed to her from her husband, she got a stepped-up basis meaning that since the house had appreciated in value since she bought it, she only had to pay taxes on the difference in the increased value at the time of her husband’s death and what she sold the property for.

By transferring the house to the children, they don’t get a stepped-up basis. This doesn’t apply to a gift made during one’s lifetime. When the children get ready to sell the home, the basis will be the value that was established at the time of her husband’s death, even if the property increased in value by the time of the mother’s death. The children will have to pay tax on the difference between that value, which is likely to be quite lower, and the sale price of the house.

There are many overlapping issues that go into creating an estate plan. The average person who doesn’t handle estate planning on a regular basis (and even an attorney who does not handle estate planning on a regular basis), doesn’t know how one fact can impact another.

Sitting down with an experienced estate planning attorney, who understands the tax issues surrounding estate planning, gifting, real estate, and inheritances, will protect the value of the assets being passed to the next generation and protect the family. It’s money well spent.

Reference: Glen Rose Reporter (September 17, 2019) “Do-it-yourself estate plan goes awry”

 

Why It’s Always Better to Plan Ahead
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Why It’s Always Better to Plan Ahead

Two stories of two people who managed their personal lives very differently illustrate the enormous difference that can happen for those who refuse to prepare themselves and their families for the events that often accompany aging. As an article from Sedona Red Rock News titled “Plan ahead in case of sudden sickness or death” makes clear, the value of advance planning becomes very clear. One man, let’s call him Ben, has been married for 47 years and he’s always overseen the family finances. He has a stroke and can’t walk or talk. His wife Shirley is overwhelmed with worry about her husband’s illness. Making matters worse, she doesn’t know what bills need to be paid or when they are due.

On the other side of town is Louise. At 80, she fell in her own kitchen and broke her hip, a common injury for the elderly. After a week in the hospital, she spent two months in a rehabilitation nursing home. Her son lives on the other side of the country, but he was able to pay her bills and handle all the Medicare issues. Several years ago, Louise and her son had planned what he should do in case she had a health crisis.

More good planning on Louise’s part: all her important papers were organized and put into one place, and she told her son where they could be found. She also shared with him the name of her attorney, a list of people to contact at her bank, primary physician’s office, financial advisor, and insurance agent. She also made sure her son had copies of her Medicare and any other health insurance information. She made sure to have a legal document prepared so her son could talk with her doctors about her health and any health insurance matters.

And then there’s Ben. He always handled everything and wouldn’t let anyone else get involved. Only Ben knew the whereabouts of his life insurance policy, the title to his car, and the deed to the house. Ben never expected that someone else would need to know these things. Shirley has a tough job ahead of her. There are many steps involved in getting ready for an emergency, but as you can see, this is a necessary task to start and finish.

First, gather up all your important information. That includes your full legal name, Social Security number, birth certificate, marriage certificate, divorce papers, citizenship or adoption papers, information on employers, any military service information, phone numbers for close friends, relatives, doctors, estate planning attorney, financial advisor, CPA, and any other professionals.

Your will, power of attorney, health care power of attorney, living will and any directives should be stored in a secure location. Make sure at least two people know where they are located. Talk with your estate planning attorney to find out if they will store any documents on your behalf.

Financial records should be organized. That includes all your insurance policies, bank accounts, investment accounts, 401(k), or other retirement accounts, copies of the most recent tax returns, and any other information about your financial life.

Advance planning does take time, but not planning will create havoc for your family during a difficult time.

Reference: Sedona Red Rock News (July 9, 2019) “Plan ahead in case of sudden sickness or death”

 

How Does a Life Estate Deed Work for an Executor?

What should this person do next? What is allowed and what is not? This complex question is addressed in My San Antonio’s article, “Life estate deed by agent must preserve estate plan.” First, let’s clarify what a life estate deed is, and why it was used in this person’s estate plan.

A life estate deed is a real estate ownership arrangement, by which the owner gifts or sells to someone, in this case to the beneficiary child, a “remainder interest” in a piece of real estate property. The owner of the property holds a “life estate” in the real estate, which includes the right to live in the property, use it and even profit from it, as long as the life estate holder is alive. The remainder interest holder, the heir, can’t interfere with the life estate holder’s use of the property, while they are living.

The remainder interest holder does have an ownership interest in the property, which is granted in the life estate deed. The IRS publishes a table so that the value of the remainder interest can be calculated. Here’s why that matters:

  • If the remainder is gifted, then the IRS table determines the gift tax amount.
  • If the property is sold while the life holder is alive, the proceeds are split with the remainder holder, with the value determined from the IRS tables.
  • If the life estate holder needs to apply for Medicaid, the gift value of the remainder will cause a disqualification.

If the life estate holder decides to sell the property, permission from the remainder holder is required. The life estate holder may not have to pay taxes, but the remainder interest holder is likely to owe capital gain taxes, if the property is sold.

There is a special type of estate deed which changes the description above. Known as an enhanced life estate deed, or a “lady bird deed,” the owner is given the right to cancel the deed at any time. Since there is no value transferred to the remainder holder, there is no gift tax, no disqualification from Medicaid and the life estate holder can sell without needing to obtain permission from the remainder holder.

In the example above, the father did not sell his life estate interest, but retained it until the date of his death. The first challenge is proving ownership of the property. The original life estate deed should be proof of the ownership, but it must be combined with proof of death. The official death certificate will be needed to be presented to the title company, which will establish ownership under the original life estate deed.

The Alzheimer’s diagnosis creates another hurdle. Title companies are cautious when circumstances could be interpreted as self-dealing. They may ask if the agent had preserved the principal’s estate plan. In other words, did the father’s will give the house to the agent or to someone else? The agent may not act in a way that violates the existing estate plan. The durable power of attorney must be recorded with the county clerk for the life estate deed to be valid.

This is a situation where a qualified estate planning attorney will be able to ensure that proper measures are taken to protect the heir, as well as the estate.

Reference: My San Antonio (Feb. 11, 2019) “Life estate deed by agent must preserve estate plan”

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