Passing Your Real Estate on Successfully: Avoiding Probate

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When you want to leave a valuable asset behind for your beneficiaries, real estate makes an excellent gift. However, if you do not plan carefully, the property may have to go through probate court. Once it is in probate court, the court decides how to divide your estate and property. This means it may have to be sold and some of its value used to pay probate fees, taxes, attorney fees, and more. Even if the court follows your wishes as stated in your will, probate could mean a lengthy hassle for your heirs.

The probate process, which differs around the country, can take time to complete—possibly more than a year. To avoid probate (and its headaches) and to ensure that your property goes to your chosen beneficiaries, there are several steps you can take in advance. Here are some tools you can use for probate avoidance.

Why a Will May Not Be Enough

It is often believed that making a will is an excellent way to pass on your property. Although this tool works in many situations, it’s important to remember—especially if you have a larger estate—that a will can be contested. If it is, the settlement will be delayed, and your wishes as to which beneficiary or beneficiaries should inherit your property may go unfulfilled.

A Living Trust

One way to avoid probate on your real estate is to create a living trust—also called a revocable trust. When creating a living trust, you would normally name yourself as the trustee, and also name a successor trustee.

While you are alive, you are the trustee of your living trust. This enables you to retain complete control over the assets and real estate in the trust. You are free to remove them from it or add more to it at any time.

When you die, your control over your property ceases. It is put into the trust, where it falls under the new trustee’s control. Since you will no longer own the property, it cannot fall into the hands of probate court when you die. Creditors also cannot touch it at that time.

A word of warning: as long as you have control of the contents of your trust during your lifetime, your creditors can also get access to it.  If you wish to avoid this possibility, you must transfer ownership of the trust while you are alive. An example of this is a Domestic Asset Protection Trust (DAPT), which places control of your trust in an independent trustee’s hands, while maintaining your status as beneficiary.

Joint Ownership of Property

When you have joint ownership of property, the probate court does not get involved. At the death of a partner, the property is transferred automatically to the surviving owner. To get joint ownership, the owning parties must sign the deed and describe their joint ownership clearly in it.

Having joint ownership of your property is a good way to prevent the probate court from getting involved. When one partner dies, the property is transferred automatically to the surviving owner.

There are four different ways that you can have joint ownership of real estate or other property. They are:

1. Tenancy in Common

A Tenancy in Common (TIC) arrangement makes each tenant equal. All owners have equal access and use of the property, although they can own varying shares of the property.

One tenant can sell their portion of a TIC without the consent of the other owner (or owners). They cannot sell the other tenant’s portion. When one partner dies, their ownership is transferred to a beneficiary chosen by the dead partner—not to the other tenant or tenants.

2. Joint Tenancy

The joint tenancy arrangement is also called “joint tenancy with right of survivorship” (JTWROS). Married couples often use this form of joint ownership because when one spouse dies, the real estate is transferred automatically to the surviving spouse without going through probate court.

Joint tenancy offers some protection against creditors, as they are limited to the owing partner’s share of the property.

3. Tenancy by the Entirety

Tenancy by the entirety (TBE) form of joint ownership is only valid if the owners are married.  The couple must be married when creating the document. They must still be married if the surviving partner is to receive ownership of the property. Owners cannot give the property to anyone else.

A surviving spouse can change the type of ownership if he or she intends to pass it on to a son or daughter. However, under TBE, the spouses cannot give the property to someone they are not married to.

4. Community Property with Right of Survivorship

People living in nine states have access to this form of estate planning: California, Arizona, Nevada, Louisiana, Idaho, New Mexico, Washington, Texas, and Wisconsin. These states are community property states.

Community property laws state that property acquired during a marriage (with some exceptions) is presumed to be owned equally by both spouses. It does not matter which spouse earned the money or bought the property. However, under community property laws, when one spouse dies, the half of the property that belonged to the deceased spouse does not automatically go to the surviving spouse.

In community property states, when you do nothing, your property is automatically considered community property.  However, an agreement, such as a prenuptial or postnuptial agreement, can be used to designate some of the property separate property. Married couples can also opt out of community property status, for instance by designating a joint tenancy.

Maintaining Community Property But Avoiding Probate

Couples can maintain their community property status, but avoid probate, by declaring that their real estate is community property with right of survivorship.

In some states, this means designating community property with right of survivorship status on the property’s title.  You will want to consult an attorney to make sure you are using the correct language.  In other states, such as Texas, it involves drafting a separate document:  a marital property agreement, or a community property agreement.

One difficulty with community property with right of survivorship is that creditors can access your assets—even if your spouse (now deceased) incurred the debt.

Joint Tenancy vs. Community Property: Tax Implications

The main benefit to community property with right of survivorship lies in the taxes that may apply after the property is sold. Under a joint tenancy, if one spouse dies, the surviving spouse would owe capital gains tax if the property is sold. Under community property, the sale would not be subject to capital gains tax.

Conclusion

The death of a loved one is stressful enough, without the added stress of a lengthy probate process. With a little planning, however, these financial tools show you how to avoid probate. To ensure that you will accomplish what you want, talk to an estate and tax planning attorney.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.