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Real Property and the Estate Process

There are many ways you can hold title to real property, which is defined as land and anything erected on it. However, how real property is titled will affect how it is transferred during the administration of an estate.

Consider this example: A father and son own a farm, where they have both worked for decades. The property sits on land that has appreciated in value greatly over the years. The father is a widower with no other children and lives in a house on the property.

The son is married with three children and lives in a house in a nearby town. Unexpectedly, the son dies in a car accident. Does the father become the sole owner of the farm? Does the son's spouse inherit half?

It depends on how the property is titled. 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.

Avoiding Probate

Estate planning techniques to avoid probate depend on how you hold title to the property (see right-hand box for some options). The most common way that allows for the avoidance of probate is when spouses own property as tenants by the entirety. By owning the property together, it passes to the surviving spouse outside of the probate process, avoiding delays and hassle.

Another way to avoid probate is for two individuals 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 when considering the total value of your entire estate.

Yet another way to own real property that allows for the avoidance of 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 having the need to probate the property.

If a property that 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 pre-approval of the transfer of property. Generally, mortgage companies permit the transfer to a revocable trust. Also, you must file forms and pay fees to your local governmental entity to effectuate the transfer and record the new deed.

Common Ways of Owning Property

Subject to the terminology of each state, most people who own private residences are:

  • Sole owners
  • Joint owners with rights of survivorship (in other words, the property is owned by another person and either party can inherit the other party's share)
  • Tenants in common (in other words, an individual owns property with another person but the heirs of each party inherit their own share)
  • Tenants by the entirety (own property as a married couple with each spouse passing it to the surviving spouse)

Other ways to own real estate are through an entity such as a corporation, LLC, or partnership, or through a trust. Depending on the state, there may be additional ways to hold title to the property. Each way has to be dealt with during the estate administration process.

Limiting Liability During Life but Property Goes Through Probate

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.

Tenants in Common

Holding title as tenants in common will result in the property going through probate. Holding title to the property as tenants in common sometimes results in contention with the other owner and the persons 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 in the future with new ownership of the real property. Consult with your estate planning advisor about the best way to hold your real property so that you have an estate plan that best meets your wishes and streamlines the transfer process.

Give our team a call at (800) 761-0432 or contact us online today to get started on your case.