If the only major asset of an estate is real estate, there are a few states (Florida, Michigan, West Virginia, Texas, and Vermont) that allow the use of a special type of deed to transfer property at death with no probate court involvement or permission. This so-called “ladybird deed,” also known as an enhanced life estate deed, allows a person (the grantor) to transfer the property to others (grantees) at the grantor’s death while retaining the owner’s ability to sell, mortgage, or gift the property during his or her lifetime without the signatures or permission of the grantees. At the death of the grantor, the property automatically becomes the property of the named heirs on the deed. Should the grantor decide to dispose of the property, mortgage it, or give it to someone else, he or she does not need the permission of the grantees to do so, since they have only a revocable contingent interest in the property.
This deed also has advantageous tax benefits. Since the gift to the grantees is a contingent gift, it is not complete until the grantor dies and the deed is still in effect. So, the tax basis for purposes of determining federal capital gains tax is the value as of the date of death, not the value at the time of the deed. That means there is no gain if the heirs sell right away.
A more modern type of deed that is used to avoid probate is called the transfer on death (TOD) deed. At last count, twenty-four states recognize this type of transfer. The TOD deed is very similar to the ladybird deed in that the grantor retains control of the property during his lifetime and can revoke the deed and mortgage, sell, or transfer the property. However, in most states that recognize the TOD, it has to be registered or filed with the recorder of deeds before the grantor’s death, unlike the ladybird deed, which can be filed either before or after death, depending upon state law.
Using one of these types of deeds allows for immediate transfer of the real estate to the named heirs merely by filing the grantor’s death certificate with the register of deeds where the property is located.
In states that do not allow a ladybird deed or a TOD, a deed can still be made in which the grantor retains the right to possession of the property during their lifetime with the title transferring automatically to the remaindermen at death. However, the grantor cannot sell, gift, or mortgage the property without the permission of the co-owners (and their spouses in most cases). While the interests of the remaindermen cannot be changed, the deed can be written in such a way that if a remainderman dies before the grantor, the share of that remainderman lapses and goes to the other remaindermen, if any, and if none, back to the grantor.
Other types of deeds that avoid probate include transfer from the property owner to others in the following ways. Keep in mind that making such a transfer could trigger a reassessment of the property’s value for tax purposes, depending upon your local law. Check with your local tax assessor.
- Tenants in common. This type of ownership allows two or more grantees to own the property jointly in independent shares, with no right of survivorship. The individual owners own their separate share of the property and can gift, sell, mortgage (in most cases), and leave it in a will to their own heirs. Once the property share is deeded to them, they do not need the permission of the other owners to manage their ownership shares. At the death of a tenant in common owner, his or her share is part of his or her estate and can pass under a will or trust. The grantor cannot revoke this ownership interest, as it is a completed legal transfer as soon as the deed is made and delivered.
- Joint tenancy with right of survivorship. In this kind of ownership, the property belongs to two or more people jointly and their shares may not be transferred or sold without the consent of all the other owners (and their spouses in most cases). At the death of a joint tenant, that share lapses and automatically belongs to the surviving joint tenants pro rata. This is sometimes referred to as the “last man standing” rule. It is a popular scenario in British mysteries.
- Tenancy by the entireties. This is co-ownership by a married couple. Transfer of the property requires the consent of both of them. Should one die before the other, the entire property automatically belongs to the survivor by merely filing the death certificate with the recorder of deeds.
Example
Be careful what kind of deed you are making, since the wrong choice and changed circumstances can lead to an unwanted end result. I once had a situation with an unmarried father with three adult children who made a deed to his kids for the family home. He had downloaded the deed form from an online legal form site. All three were married but the deed just named the three children, not the spouses, as tenants in common. No mention was made of the word “survivorship.”
Then one of the children died, leaving a surviving wife, Dad’s daughter-in-law. She contacted a lawyer, who informed the father that the wife wanted to partition the property or be paid her share of its value. Apparently, she was not so fond of her father-in-law once her husband was gone. Now, this was the father’s only home, he was still alive, and he had assumed that the property would pass to his children only at his death.
The deed was intended as a probate-avoiding gift, but legally it was not doing what he had planned. The law was on her side. There was no right of survivorship. We had to go to court in an attempt to invalidate the deed on the basis of mistake, but in the end had to settle with the daughter-in-law to keep him in the home. Be careful doing your own legal work, even a simple deed, since unforeseen consequences can occur.
Transferring the property into the name of a revocable trust can accomplish the same thing as a deed, but it requires the drafting of a trust, which will be more costly than merely preparing a deed. I do not recommend that anyone draft their own deed, hoping to meet the statutory requirements for a probate-free title transfer. Hiring a local real estate attorney for services limited to only the deed preparation is the best way to be sure your intentions are carried out. If you don’t have an attorney, a local title insurance company can either prepare the correct deed for you or refer you to a real estate attorney.
What if you own property in more than one state? Unless you have used a probate-avoiding technique for the property, you will have to go through some type of probate in every one of those states. The full probate would be in your home state with so-called ancillary probate in the other states. You can understand how this could greatly magnify your probate costs, since a separate attorney and a separate probate process would be required for each state. Using a trust or probate-avoiding deeds will eliminate probate everywhere.
(To be continued...)
This excerpt is taken from “How to Avoid Probate for Everyone: Protecting Your Estate for Your Loved Ones” by Ronald Farrington Sharp. To read other articles of this book, click here. To buy this book, click here.
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