A home is often one of the most important assets that people own. Therefore, most people want to stay in their home until they die and then have a loved one receive it. One common way to pass a home to loved ones is through a will. However, transferring property with a will requires probate, which is generally considered a lengthy, costly, and public court process that many actively seek to avoid.
There are several ways an estate plan can transfer property without a will or probate court involvement when the owner passes away. In addition to a lifetime transfer of the property (by sale or gift), certain types of deeds can be used that take effect only upon the property owner’s death and do not subject the property to probate. However, using these deeds for probate avoidance can potentially introduce new issues. A trust-based estate plan may be a better option if the goal is simply to avoid probate.
Home Ownership and Inheritance
We are living through one of the largest intergenerational wealth transfers in history. Roughly one in six Americans expect to receive an inheritance in the next 10 years, and among those, nearly half anticipate inheriting property such as a house.
According to Pew Research, in 2021, nearly two-thirds of US households lived in a home they owned as their primary residence. Homeowners have, on average, around $174,000 in equity in their homes—more than double the value of their next most valuable asset, retirement accounts, which have an average value of $76,000.
Real Property, Legal Rights, and Trusts
A key concept in estate planning is honoring people’s wishes by helping them control, as much as possible, what they own and what happens to it after their death.
An estate plan enables a homeowner to decide what happens to their property after they pass away, ensuring that it goes to the person (or people) they choose in a manner of their choosing, whether that means keeping it in the family and setting limits on its use or transferring the property to a beneficiary without restrictions.
Options for Transferring Real Property at Your Death
Estate planning is highly flexible, offering multiple ways to satisfy someone’s wishes for what happens to their money and property when they die, each with a mix of benefits and downsides.
To avoid probate, there are many ways to transfer real property, both during the owner’s lifetime and at their death. Some solutions can cost less than a trust, but as the examples below show, they can also have significant downsides and risks.
Deed-Based Transfers
A deed is a legal document that transfers real estate ownership from the current owner (the grantor) to another individual or entity (the grantee). Several types of deeds can be used to gift real property at the grantor’s death. They include the following:
- Life estate deed. A life estate, created through a life estate deed, gives a person the right to live in and use a property for their lifetime. The life estate’s owner is called the life tenant, and the person who receives the property after the life tenant’s death is called the remainderman. Some people may consider using a life estate deed to retain the ability to live in their own home while they are alive, allowing them to name the remainderman who will receive the property at the life tenant’s death. While a life estate avoids probate, the creation of the life estate can be undone only if the remainderman agrees. Because the goals, legal rights, and responsibilities of the life tenant and the remainderman may differ, disagreements may arise between them over, among other things, property use, improvements, or maintenance. In addition, a life tenant cannot liquidate or sell the property without the remainderman’s agreement.
- Enhanced life estate deed. Also known as a ladybird deed, an enhanced life estate deed allows the grantor (who becomes the life tenant) to retain the ability to live in their home and the right to use, mortgage, sell, gift, and otherwise convey the property during their lifetime without the signature or blessing of the remainderman. When the life tenant dies, if they still own the property at their death, the remainderman will receive it. This provides flexibility for a property owner wanting to name who will receive the property at their death while retaining control over it throughout their lifetime. However, this type of deed is not available in all states.
- Beneficiary deed. Also known as a transfer-on-death (TOD) deed, a beneficiary deed automatically transfers the deeded property to a named beneficiary at the time of the property owner’s death. The transfer avoids probate, and the deed can be revoked anytime during the owner’s lifetime. However, not all states allow beneficiary deeds.
Again, not all of these types of deeds are legally valid in all states. An experienced estate planning attorney can explain what tools are available to you and discuss the benefits and potential risks.
Downsides to Using a Deed to Transfer Property at Your Death
There is no creditor protection for your beneficiaries. When a deed transfers property to a beneficiary, that property goes to the beneficiary outright. There are no strings attached and no protections. For instance, if the beneficiary were to receive the property during a bankruptcy proceeding, it might be used to satisfy the creditors because it is now considered the beneficiary’s property.
There is no protection if the beneficiary is disabled or unable to manage their affairs. As previously mentioned, when the beneficiary receives the property, it is theirs. However, if they receive the property when they cannot manage their affairs, its management falls to another person. It may be handled by a court-appointed guardian or conservator or an agent under a financial power of attorney, who can do whatever they want with it (as long as it is in the incapacitated beneficiary’s best interest). Also, if the beneficiary receives any means-based assistance, the sudden inheritance could jeopardize those benefits by placing the beneficiary above any applicable asset threshold.