How to Pass Your Home to Your Loves

How to handle someone’s home or secondary property is a large part of many estate plans as it can be the largest asset in an estate.  Using the right tool to pass along the belongings inside the home and the home itself depends on the goals of the homeowner and who the property is going to.

The most common way homes transfer in an estate is through a Will.  The Will of a homeowner can include instructions for what happens with both their tangible personal property (belongings in the property) and the property itself after they die.  Estate Planning Attorneys can write rules in your will for how the property will be gifted outright to a specific individual, or for an individual to have the first right to purchase a property from the estate, and how that purchase price will be calculated (will that individual have to pay market value or a discounted rate).  More often we do not make a specific provision in the will for the property and the Personal Representative of the estate will have the authority to list and sell the property with the proceeds being distributed to the named beneficiaries or charities in the Will of the deceased homeowner.

A second way the property can be handled is by the homeowner putting the property into a revocable or irrevocable trust.  Similar to Will provisions the trust can detail what happens to the belongings and property itself upon the death of the owner. A trust provides additional benefits for incapacity planning as the trust can detail what happens to the property in the event of incapacity or long illness of the homeowner such as, at what point can the property be sold, to whom and how to calculate the sale price. Note the property must be deeded into the trust for these provisions to be enforceable.  The trustee can only manage the assets “inside” or titled in the name of the trust.

A third way of transferring property is by recording a Transfer on Death Deed (TODD) with the county, until recorded the TODD will not transfer property.  A TODD functions like a beneficiary designation; the property remains in full ownership and control of the homeowner and only upon the homeowner’s death does the named beneficiary have an ownership interest. A benefit to TODD is that they are easily revocable during the life of the homeowner.  Many people like the concept of a TODD to avoid probate, however, there are risks to using TODDS.  The first consideration is who the beneficiaries are; naming multiple beneficiaries can cause problems as they will take ownership together and need to agree on what to do with the property, a sale price and everyone signing all the sale documents.  Spouses of the named beneficiaries will also likely need to sign any sale documents.  This is especially hard when one beneficiary may live in the property, but not have the means to maintain the property on their own.  TODDs are also problematic when there is a mortgage on the property and other potential debts from the decedent that could be tied to the property and passed along to the TODD beneficiary.  Lastly, in Minnesota it was determined that homeowner’s insurance does not continue to cover the property after death.  So, unless the decedent’s homeowner’s insurance names the TODD beneficiary and is specific that it covers the property after death if there is a problem at the property before the TODD beneficiary gets their own insurance the property likely is not covered.

There are a few less common options like using a Life Estate Deed, which transfers a partial, ownership to the beneficiary and simply adding an additional owner.  Life Estate Deeds are complex tools and differs from the first three options as a life estate deed gives a present interest during the life of the homeowner, it is not easy to change once put in place and so should only be done after a full understanding of the percentages of ownership that will change and long-term impacts.  I have never recommended just putting someone else’s name as a co-owner on the property; there are potential capital gains tax issues with putting someone else on title and it is very hard to undue if there is a break down in the relationship with the co-owner.

As always, real estate is just one piece of the estate planning puzzle, a comprehensive estate plan will take into consideration how best to meet your planning goals and keep things simple for your beneficiaries.