By Team Tomorrow
Published July 9, 2019
Have you recently bought a home? If so, consider updating or creating a will or trust while you are still in paperwork mode. A home is a significant asset, and there are a number of things you can do now to prevent inheritance or other issues later.
Whether your new home is your first home, one of several you have owned, an investment property, or your retirement home, having an estate plan in place will potentially provide you with benefits regarding the control of your property during your life, in addition to giving you control over how your property is distributed after your passing.
Here are three things to keep in mind when planning for a new home:
When you buy a home, you will decide how to hold title to the home. The way you hold title can affect who will inherit your property and whose debts can be claimed against it. You can change the title later if you decide that there is a better way to hold the property, but that can be a hassle.
The general options for holding title are 1) sole ownership (sometimes called “tenancy in severalty”), 2) joint ownership with another person, 3) ownership through a living trust, or 4) in states that allow it, sole or joint ownership subject to a transfer-on-death deed.
For people who are considering joint ownership, the types of joint ownership are 1) tenancy in common, 2) joint tenancy, 3) tenancy by the entirety, 4) community property, or 5) community property with right of survivorship. Tenancy in common and joint tenancy are generally recognized in every state and the co-owners don’t have to be spouses. The other three types of joint ownership are only available in some states and are only available between spouses (or domestic partners).
Property title rules vary from state to state, so it’s important to look into the rules in your state.
If you are single, the type of title may seem like a no-brainer—put the property in your individual name. But that is not necessarily the best option, whether you are single or married.
For example, what happens if you own a property as an individual and become physically or mentally incapacitated? If your property needs to be refinanced, or a line of credit taken out, a guardian will need to be appointed by the court. A power of attorney is generally insufficient.
In addition, if you hold the property in your name, your house will be included in your “probate” estate when you pass away. That means that there will be some court involvement in the transfer of the property after you pass away. This can create a delay or burden for your heirs.
But, that does not necessarily mean that you should add a co-owner to the title, as in a tenancy in common or a joint tenancy.
For one thing, if you hold title with another co-owner, you could lose the property if the co-owner has significant debts or obligations. Also, if your co-owner is not your spouse and didn’t help pay for the home, you may make a taxable gift to them if you add them to your title.
And with a tenancy in common, your co-owner can usually transfer their share without your permission. If your co-owner decides to sell their share or if it is passed on to an heir, you may end up with an unwanted co-owner.
If you are married (or in a domestic partnership), you may think that holding property as joint tenants with rights of survivorship is a no-brainer. But that default option is also not necessarily the best option.
As mentioned above, holding title as joint tenants means that you have exposure to your co-owner’s debts and obligations. If creditors sue your co-owner, your property could be taken away. If your spouse has major debt, you might want to consider another option besides joint tenancy.
Some states offer a type of ownership called tenancy by the entirety. Tenancy by the entirety is a lot like joint tenancy with right of survivorship, except that only joint debts of both owners can be claimed against the property. This may be a better form of ownership for married couples.
There are some advantages to joint tenancy, tenancy by the entirety, community property (an option in only 9 states) and tenancy in common, but each option also has its own drawbacks. The option that allows you the most control over your property is creating a revocable living trust.
Whether you are single or married, the best option is usually to hold title in a revocable living trust. Living trusts present a number of advantages.
First, if you have a living trust, the property can be held in the trustee’s name (which is usually you). If anything happens to you, a successor trustee can manage the property without first having to be appointed by a court.
Second, a will is part of a public probate file, but if you have a living trust, the assets and terms of the trust stay private.
Lastly, property you transfer to a living trust during your life isn’t subject to potentially long and complicated probate procedures when you pass away.
If you do not yet have a will or trust, now is a good time to create them. Make sure that your will and trust include instructions for how to distribute your new property after you pass away. If you already have a will and trust in place, update them to include your new home.
Make sure that your will and trust are both properly executed. Also, be sure to place a copy on file with your attorney or in a secure place.
If you decide to switch the way the title of your home is held, take the proper steps to get your home retitled:
There may be a fee for changing the title, but it is worth it to protect your assets, ensure you’re getting the tax treatment you want, and be certain that you can control what happens to your property.