The number one reason our clients go through probate is to transfer ownership of real estate. However, with some advance planning during their lifetime, these probates could have been completely avoided, saving families both time and money. In today's blog post, we will discuss the basics of estate planning options when real property is involved.
First, let's clarify what real property means. Real property includes land, buildings, structures, and mineral interests. Unlike other types of property, when someone passes away owning real property, probate proceedings must be initiated in every state where they owned real property. For instance, if you own a homestead in Texas, a rental property in Florida, and a mineral interest in Louisiana, you could be faced with THREE separate probate proceedings. This means dealing with three separate courts and hiring three separate attorneys, which quickly becomes expensive and burdensome for your surviving loved ones.
However, many people are unaware that it's relatively simple to keep real property out of probate through proper planning during life. There are three main ways to achieve this: 1) Transfer on Death Deed, 2) Ladybird Deed, and 3) Trust-based planning.
Transfer on Death Deed:
In 2015, Texas passed the Real Property Transfer on Death Act (TODD Act), which allows the preparation of Transfer on Death Deeds (also known as TODDs). Transfer on Death Deeds provide a straightforward method to transfer ownership after you pass away. An attorney can assist you in preparing the Transfer on Death Deed, which specifies who will inherit your interest in the property. Additionally, the deed can name an alternate beneficiary as a safety net in case your primary beneficiary predeceases you. You can designate single or multiple beneficiaries on your Transfer on Death Deed. After your passing, the beneficiary of the real property files an Affidavit of Death to clear title to the property. If a Transfer on Death Deed has been properly prepared and filed, your beneficiary should be able to avoid probate and still inherit the property. It's important to note that Transfer on Death Deeds do not impact your ownership of the property during your lifetime, nor do they affect your homestead exemption or require updates to your mortgage or insurance. These deeds are also revocable, meaning you can change your mind and revoke the deed in the future. You can even sell the property to which the deed applies without needing the approval of the remainder beneficiaries. However, under the statute, if the estate does not have sufficient assets to cover the debts, a creditor can access property transferred via a Transfer on Death Deed. This claims period expires after two years, at which point the transfer becomes permanent regardless of the estate's debts.
Prior to the 2015 Texas Real Property Transfer on Death Act, Texas courts recognized the Ladybird Deed as a common law approach to transferring real property via deed before death. Although the impact of the Ladybird Deed is often similar to that of a Transfer on Death Deed, the mechanism is slightly different. With a Ladybird Deed, the grantor retains a life estate in the property and designates remainder beneficiaries to inherit the property after the grantor's passing. This means the grantor can use the property for the remainder of their life, knowing that upon their death, the property will pass to the designated remainder beneficiaries. Unlike Transfer on Death Deeds, Ladybird Deeds provide the remainder beneficiaries with an immediate interest in the grantor's property. However, the grantor still has the ability to revoke the deed or sell the property and keep the proceeds. Additionally, Ladybird Deeds do not include a creditor claw back provision, which can be significant for insolvent estates.
Another option to avoid probate for real property is to transfer ownership of the property into a trust. While we won't delve into all the details of trust-based planning here, it's important to understand that by transferring ownership of the property into a trust during your lifetime, probate will not be required upon your passing. Property transfer to a trust can be done through a general warranty deed or a Transfer on Death Deed. If you opt for a Revocable Living Trust, you will maintain full control over the trust during your life. This means you can add additional property to the trust or remove property from it at any time without needing the consent of future beneficiaries.
Each of the above options has its own benefits and disadvantages. However, the common goal is to keep your real property out of probate and enable the immediate transfer of ownership after your passing.
To determine which approach may be right for you, it's advisable to consult with an attorney. They can provide further guidance and information based on your specific circumstances.