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Real Estate Planning: Before & During Probate

Basic real estate succession planning  typically is planning to ensure that your children (or whomever you want), will inherit your home when you die.  For most folk, real estate means their personal residence and is their most valuable asset. For the purpose of this article, real estate includes  virtually all kinds of real estate.  Concerned about the potential claims of creditors and other family members, the IRS, and for various other reasons, many go about trying to protect their property the wrong way, sometimes with catastrophic consequences.  In most cases, the right way to achieve this goal is to keep your real property out of probate. Simply adding a family member to your deed usually is a bad idea!

While ignorance may be bliss, there many important considerations to be considered in determining whether and how to protect one’s property. Decisions made without the right information can have unintended consequences and cause great hardship to those you love and were trying to help. So, yes, legal services involve far more than “just” preparing a “simple” document. The real value, that you should gladly pay for, is the knowledge and experience that underlies the questions the lawyer asks to get to understand your needs, concerns and true objectives, consider which laws and potential issues need to be taken into account in order to determine the best approach for you and explain this in a way that enables you to make an informed decision with confidence and Peace of Mind.

Perhaps the most effective and commonly used approach to keep a home or other real estate out of probate is the life estate deed.  There are different types of life estate deeds and the choices may seem similar on one level, but can have substantially different consequences in certain circumstances, such as bankruptcy protection, divorce, maintaining control of the property and access to equity, Medicaid eligibility and asset protection planning, among others.

The key benefit of making a life estate deed is that the property becomes a non-probate asset and, since it is not part of one’s probate estate, it cannot become subject to the claims of one’s ordinary creditors. On your death, the property will bypass probate and go directly to the persons named in the deed. Another major benefit is that acquistion of a property by life estate deed is treated as inherited property.  The advantage of inheriting real estate rather than receiving it as a gift, is that the recipient receives a stepped up tax basis to the fair market value as of the date of death of the decedent rather than receiving the carry over basis of the decedent, thereby avoiding capital gains tax liability.

In addition, one can save money through using the deed to make multi-generational transfers without the concern that someone may overlook or neglect to plan effectively for the next generation.  Once again, there are other considerations that come into play, so one should be careful to avoid having the tail wag the dog. Sound legal advice is invaluable in all deed planning decision-making.

After the death of the decedent, if none of the above planning was implemented,  the real estate will be included in the probate estate. Assuming there are sufficient liquid assets to pay all the administration expenses, estate debts and distributive shares without having to sell the real estate, there exists an opportunity to do some smart estate planning, save money and eliminate the risk of a failure to plan in the future.

An experienced estate planning lawyer may be able to identify intelligent estate planning opportunities for you, save you money in the long run, and reduce risk. Instead of having the Personal Representative (also known as the Executor) simply transfer the property from the estate to the beneficiary, depending on the planning objective, one may be able to create several levels of planning in one deed. A trust may also be worthy of consideration.   This is another advantage to having the mindset that consulting with a professional is a smart investment, rather than trying to save money by making decisions solely based on price.