Estate Planning for Property Owners

A common question we are asked at our office is whether assets should be placed in a trust and why. Most homeowners are aware that if they hold title as joint tenants with a spouse when one of them passes the property goes to the remaining spouse under ‘rights of survivorship’.

Although the outcome of the scenario mentioned is accurate, the parties run the risk of the property going into probate is God forbid both owners pass away in a car crash. And what if title passes to one of the spouses and the surviving spouse decides to not to provide for the children of the deceased (if from a prior relationship or marriage).

Proper estate planning is vital in ensuring that the wishes of property owners are legally represented when they are no longer here. Many believe a simple will would suffice in legally transferring interest in real property; however, a will would not present a simple solution for the surviving heirs as any assets would still be subject to probate so the courts can determine the validity of the will and appoint the executor (who can be an heir of the estate or third party nominated by the executor).

If there is no will or trust, the representative of the estate would be known as the administer. The Petition for Probate would be filed by a probate attorney on behalf of the party. Letters of Administration or Testamentary would be filed(depending upon whether there was a will or not), followed by an Order for Probate, and then a Notice of Proposed Action with a copy of the accepted offer attached.

Section 4 of the Order for Probate will state whether the personal representative appointed as administer or executor has ‘full’ or ‘limited’ authority to administer the estate. Full authority does not require court confirmation while limited authority requires a court referee to perform a drive-by appraisal of the property and any accepted offers must be 90% of the appraised value.

In order to forego probate and have title properly transferred to heirs of the estate upon the death of a property owner, a trust is necessary. An estate needs to have five components to cover a home owner. The actual trust is the primary document necessary for the estate. A durable power of attorney and an advance health care directive should also be part of the estate planning package, as well as a ‘pour-over’ will (necessary in the event the property is refinanced out of a trust) and a trust transfer deed (basically a grant deed for each property within the trust).

There are two type of trust: revocable and irrevocable. A property or other assets can be removed from a revocable trust and changes can be made. An irrevocable trust is defined by the term ‘irrevocable’ and can not be changed or voided even in the event of a divorce.

A strategy some owners use to save money on estate planning is to transfer title to the property to a child or children to avoid probate. The problem is the property will be assessed at the cost basis as of the date title was transferred so a property worth $100,000.00 at the time of title transfer that is now free and clear and worth a million dollar would incur capital gains on $900,000.00!

If the property were in a trust, the heir takes title after the death of the owner and there would be ZERO capital gains on the $900,000.00!!