When we work with a client to design a comprehensive estate plan, we consider the importance of owning a home in a trust. Several factors must be given weight in deciding whether to deed a person’s home into his or her trust.
First, how the home is currently titled must be reviewed. Homes can be owned by tenants in common, by joint tenants with right of survivorship, and by tenants by the entirety. When property is held by tenants in common and an owner dies, that owner’s interest must pass through probate. When property is held by joint tenants with right of survivorship, the property does not pass through probate; it passes automatically to the survivor upon the filing of a death certificate in land records. Couples may own property in the third form of ownership, called “tenancy by the entirety.” This form of ownership allows the home to pass directly to the spouse upon the filing of a death certificate in land records, and it also allows the couple to enjoy superior creditor protection during their joint lifetimes.
Second, incapacity planning must be a consideration. None of the forms of real estate ownership address the capacity of the individual. If the owner becomes incapacitated, the property cannot be sold unless a durable power of attorney was executed before the onset of incapacity or until a conservator is court-appointed for the individual. Additionally, none of these forms of ownership address what happens in case of the death of both owners of a property. For example, if the couple expire simultaneously, then the real property must go through probate in order to pass to the couple’s heirs, despite owning the home as tenants by the entirety.
Third, probate avoidance must be considered. Probate is the court’s oversight of a person’s estate to ensure that the property goes where it is supposed to go, whether that be in accordance with a person’s last will and testament or in accordance with the intestate heirs as delineated in each state’s estate laws. In some cases, probate is an appropriate venue in which to handle a person’s estate. In other cases, clients are well advised to avoid the probate process, probate expenses, and time delays.
I prefer that clients either transfer a home into a trust to avoid probate and all that it entails or make use of a transfer-on-death deed.
Transfer Into Trust
The upside of transferring a home into trust is that doing so can be great for an individual. If an individual owns a home solely, then transferring the home into trust will be effective to avoid probate entirely. The additional benefit to the individual is that the trust can include express provisions allowing the home to be maintained, rented, or sold in case of the individual’s incapacity. This alone can bring great peace of mind to my clients and is often the guiding decision factor. Also, upon the person’s death, the trust could provide that the home be maintained in trust for a particular beneficiary, rented as an income-producing property, distributed directly to particular heirs, or sold and the proceeds earmarked for heirs.
For my couple-clients, transferring a home into trust will be effective to avoid probate whether one of the couple dies or if both expire together. It is also effective to address the same incapacity issues that a sole owner would face. Also, a couple’s trust could address how the real property is handled after one of the couple dies and what happens to the real property after the first and second of the couple die.
If a home is in trust and the trust addresses whether the home is to be maintained, rented, distributed, or sold, then there is no need to make use of a durable power of attorney or a court-appointed conservator.
There are two downsides when transferring a home into trust: First, a risk is taken if the home is mortgaged. Typically, lender consent is required to transfer a home from the client’s name into a trust name. Many lenders consider this change to be a refinance action and charge associated costs. Second, if the home was previously owned by tenants by the entirety, there is a risk that a transfer into a trust would destroy the beloved creditor protection associated with such a deed. Although some states have adopted statutes expressly authorizing the continuation of creditor protection when a couple transfers their home into trust for estate planning purposes, Oregon has not yet adopted such an express statute.
As an alternative to transferring a home into trust, clients may consider the transfer-on-death deed, which is authorized by Oregon law and that of some other states. Use of this method does not require the home to be deeded into a person’s trust. Instead, a deed is drafted to convey the home to a person or persons after the owner’s death; it functions much like a last will and testament, but only as to the real property. Upon the owner’s death, the home passes by operation of law to the next persons named on the transfer-on-death deed. The benefit to this method is that the home passes outside of probate. This method can be an inexpensive, fast, and easy way to address transfer of real property at death. Furthermore, the owner is not restricted from selling the home before death.
But the transfer-on-death-deed method fails to address a client’s potential incapacity. For example, if a single client suffers incapacity, the home may need to be sold before death. A transfer-on-death deed has no impact on the ability to sell the property. In fact, a power of attorney or court-appointed conservator must take control of the property.
Additionally, the transfer-on-death deed does not work well for couples. Even if a couple made use of a transfer-on-death deed, it would work well only in case of simultaneous death. If one of the couple died, the original deed and its tenancy would control. For example, if the couple owned property by tenants by the entirety, the property would pass to the survivor solely, despite there being a transfer-on-death deed in land records. That sole survivor could then change the beneficiary of that property on his or her own.
When considering how to advise clients on how best to address their ownership of real property, my colleagues and I came to a general conclusion that for clients in high-risk professions (ones that are subject to high-risk lawsuits), such as those in the medical profession or home builders, then it is more important to maintain the creditor protection offered by the tenants by the entirety form of ownership instead of focusing solely on incapacity planning or probate avoidance. For our clients who are not in high-risk professions, then probate avoidance and incapacity planning seem to be better goals. For the latter clients, making use of the transfer into trust or the transfer-on-death deed is appropriate.