Properly titled property may avoid probate

Understanding the different titling options is important so that property can pass to heirs as efficiently as possible.

The way real property is titled will determine how it is transferred at death. For many physicians, owning a home or purchasing an investment property is a common tool for building wealth for themselves and eventually their heirs. Understanding the different titling options is important so that it can pass to heirs as efficiently as possible.

Real property is defined as land, and anything built on it. In general, there are six ways real property can be titled. Subject to the terminology of each state, most private residences are owned by:

  • Sole owners.
  • Tenants by the entirety (a married couple owns property with each spouse passing it to the surviving spouse).
  • Joint owners with rights of survivorship (the property is owned with another person and either party will inherit the other party's share).
  • Revocable living trust (one or more persons can own the trust)
  • An entity such as a corporation, LLC, or partnership.
  • Tenants in common (an individual owns property with another person, but the heirs of each party inherit their own share).

After an individual’s death, the estate administration process begins. The process includes a review of the property title and subsequent distribution to the next owner. You can streamline this process by titling the property in a way that passes it to the people you wish in an efficient manner. Certain ways of titling the property will also allow it to avoid probate. Probate is a court supervised procedure of administering a deceased person’s estate. It can be a long and public process. Many families prefer to avoid probate and keep their personal assets out of the public gaze. Estate planning techniques to avoid probate depend on how you choose to hold title to the property, but sometimes probate is unavoidable.  

When a property is titled in one individual’s name, it is called sole ownership. This individual owns 100% of the property. At death, a property titled as solely owned will go through the probate process. During probate, the title will be transferred at the direction of a Will. If no Will was created, title will be transferred based on the decedent’s state of residency’s intestate succession laws. Probate cannot be avoided with sole ownership.

Owning property as tenants by the entirety is the most common way to avoid probate. However, this option is only available to married couples who live in states that recognize tenants by the entirety as a form of ownership. This form of ownership helps avoid delays by passing directly to the surviving spouse outside of the probate process.

Another form of property ownership that avoids probate is for two individuals to own the real property jointly with rights of survivorship (do not need to be married). At the death of the first owner, the other owner becomes 100% owner of the property. However, caution should be used before using this form of ownership. This method of ownership may not be appropriate if your goal is for someone other than the 2nd owner to inherit the property. Once the property passes to the 2nd owner, they have total ownership of it and can do with it as they please.

A revocable living trust is another option for avoiding probate. The benefit of the trust holding title to the real estate is that the trust document specifically addresses who will inherit the property. This removes the need to probate the property. There are additional considerations if the property has a mortgage. Generally, you must get pre-approval from the mortgage company to transfer the title of the property to a revocable living trust.

When ownership involves commercial or rental property, many owners have the goal of avoiding personal liability. A common strategy to avoid liability is to create a corporation or a limited liability company and have that entity own the real property. This provides some protection from being personally responsible for the debts or liabilities of the entity. However, this form of ownership does not avoid probate. At death, the shares or membership interests in the corporation or LLC pass through the individual’s estate and must go through the probate process. During this process, the will or the state’s intestate succession laws will determine who inherits the property.

Holding title as tenants in common will result in the property going through probate. Caution should be exercised with this form of ownership as well. To avoid contention over who inherits your share or the other party’s share of the property, it is best to discuss these issues with the other owner and the heirs. This can help alleviate any tension that may occur in the future when is time for someone to inherit the property.

To ensure that your wishes are met and to streamline the process upon your death, you should consult with your estate planning adviser about the best way to title your real property. 

Jeff Witz, CFP® welcome readers’ questions.He can be reached at 800-883-8555 or witz@mediqus.com.

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