In the United States, real estate has been—and continues to be—one of the most valuable financial investments a person can make. When estate planning; however, planning the transfer of that property can feel like a complicated, emotional, and stressful endeavor.
There are multiple different ways a home can be transferred, some of the more popular methods being a will, a transfer on death deed, and trusts. The approach you choose can have a significant impact on not just your financial health, but the financial health of the recipient of your property as well. For many, choosing how and when to transfer property can be the most complex part of estate planning.
Legal fees, taxes, and other possible financial burdens mean that any asset transfer should be thoroughly thought out and planned to avoid costly mistakes and ensure everyone involved is on the same page. Identifying your goals and understanding the legal and financial implications of transferring property to a loved one will allow you to rest assured your family is taken care of.
Why Transfer Property?
In life, some assets require special estate planning. Family homes and secondary properties fall into this category of assets. Not only are there fond memories tied up in these family properties, but a substantial amount of money too.
You will want to plan ahead to ensure your property ends up in the hands of the right people. If you don't, your assets will transfer according to your state’s intestacy laws, which may or may not reflect your wishes. It is important to come up with a strategy that makes sense for you, and your heirs, and to create an efficient strategy to execute it.
How to Transfer Property?
One of the most important parts of estate planning is identifying who will be the recipients of your assets. You want to make sure whoever you have in mind is willing and able to take on the financial and emotional responsibilities that come with inheriting such a significant item.
Once you have identified a willing recipient, you can start to navigate which type of transfer would work best for you and your family. Today, there are multiple options to choose from:
Co-ownership
One way you can transfer your property is to add your desired recipient to the current deed. When you list someone as a joint tenant, they will become co-owners at the time the deed is changed. In addition, they will automatically take ownership of the home at the time of the original owner's death.
This joint tenant option may seem like a straightforward choice, but there are some nuanced downsides to co-ownership you will want to consider. One of these potential drawbacks is gift tax.
In the United States, there is a monetary limit to how much someone can gift another person without having to pay a gift tax. When a house is given as a gift through co-ownership, the monetary value of that gifted portion is considered taxable and must be reported for gift tax purposes. Depending on their financial tax history, this could potentially cost your recipient a significant amount of money.
Another disadvantage to co-ownership is that the lifestyle and opinions of your chosen co-owner can negatively affect your estate. When someone is given partial ownership of your property, a percentage of your home is now legally theirs. If they run into financial or legal trouble, your home may be put under a lien or become subject to other action.
Additionally, you would have to get permission from your co-owner to make any decisions that affect the property, such as selling the home, taking out a new mortgage, or refinancing an existing one.
These complicated legal factors should be taken into consideration when deciding if co-ownership really makes the most sense for you and your situation.
A Will
A will is a public, legally binding document where you can specify who you want to inherit your assets. The main reason people transfer homes through a will is to ensure they get to dictate who inherits their property. A will guarantees you have control over your beneficiary.
The major downside to using a will is that the home must still pass through the probate process. Though this process guarantees that your assets are transferred according to the terms of your will, it can be incredibly time-consuming and potentially expensive. Given the emotional and financial toll a death in the family can take, many try to find a way to bypass this probate process.
A Living Trust
A living trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary. The benefit of this type of trust is that you can create and manage it while you are still alive.
Using a living trust rather than a will to transfer your home allows you to be more hands on. It also removes the probate process from the equation. When you utilize a living trust and skip the probate process, your designated beneficiary will have your property transferred to them far quicker than if you had used a will.
One thing to keep in mind when using a living trust; however, is that even though your property doesn’t have to pass through probate, any outstanding debts must still be paid before the transfer can happen.
Transfer on death (TOD) Deed
A Transfer of death (TOD) deed allows a property to pass to a named beneficiary upon the death of the original owner. Unlike a co-ownership, if you use a TOD deed to transfer your assets your beneficiary has no legal rights to the property until after you pass away. This allows you to keep all ownership rights to your property during your lifetime. Another benefit of a TOD deed is it allows the asset to pass outside of probate, making it a fairly quick and private process.
TOD deed options are limited by state law, with many states not offering the option at all. You may want to consider checking with a financial advisor to determine whether this option is available and appropriate for your circumstances.
Estate Planning with a Professional Financial Advisor
With so many different possibilities to choose from, it can be difficult to determine which type of property transfer is right for you and your family. You shouldn’t have to navigate the complexities of ownership, beneficiaries, taxes, benefits, and potential liabilities all on your own.
The holistic advisors at JL Smith provide expert guidance and help make sure your choices today align with your goals tomorrow. Contact us today or schedule a free consultation to learn more about our estate planning services and how you can start planning for your future.