Homeownership: What It Could Mean for Your Estate Plan

There is one thing that we will most likely all do one day: regardless of your status in society, position at work, or whether you are tall or short, you may pass down assets to loved ones. When that day arrives, an estate plan is essential for managing and distributing those assets without too many hiccups. Physical real estate is one of the more valuable items on your asset list.

It is critical that you are knowledgeable of how the process works in your state and how to design an estate plan that can suit your wishes.

Ownership

How the property was owned can be the determining factor in what happens to it during the distribution phase of your assets. Depending on your estate plan, the home or the amount of equity you have in a home can transfer to heirs, beneficiaries, or surviving owners unless otherwise specified.

There are several ways to purchase real estate. Understanding these types of ownership and how they could impact you and your beneficiaries is crucial.

Sole ownership

Sole ownership is the possession by an entity or individual who is legally eligible to hold the title. Typically, sole ownership is held by single people, or married individuals who hold property apart from their spouse.

• Pros
  • It is easier to complete transactions as no one needs to authorize the process.
  • You control what happens to your property.
• Cons
  • The transferring of ownership from one owner to another is not a simple process especially if the owner didn’t have a will.
  • Your heirs will probably have to probate your estate to transfer the title.

Community property

              This is a type of ownership by spouses during their marriage where they choose to own property together, equally.

• Pros
  • Transferring assets to the surviving spouse may help them avoid being subject to probate.
  • There may be tax benefits.
  • Real estate acquired during a common-law marriage may also be held as community property.
• Cons
  • Risk of the possibility of divorce.
  • There is a potential lack of flexibility if the agreement needs to be amended or revoked and both parties don’t agree.
  • Only certain states recognize community laws and benefits. Pay attention to the laws in your state.

Joint tenancy

              Consists of an estate or property jointly held by two or more parties, with each party’s share passing to the other or others on death.

• Pros
  • You may be able to bypass probate.
  • It is a means to address property gets passed to a specific party in the event of death.
• Cons
  • If a co-owner has debts, their creditors may be able to seize an interest in your home.
  • If you are experiencing a testy divorce a joint tenancy could complicate matters.

Tenants in common (or joint ownership without right of survivorship)

This is a legal arrangement in which multiple parties share ownership rights in real estate property or land. It differs from joint tenancy as interests don’t have to be equal shares.

• Pros
  • Upon death, you can bequeath your share of the property to a named beneficiary.
  • Shares in the property don’t have to be equal.
  • There is no right to survivorship (when one tenant dies, the other tenants’ shares increase in the amount of your interest).
• Cons
  • All parties involved are responsible for monthly bills and other property payments.
  • If one tenant wants to sell the property, this can be problematic for others in the agreement.

Tenants by the entirety (TE)

TE is a type of ownership where each spouse owns an undivided interest in the property. Right of survivorship also applies here. Unlike community property, creditors of an individual spouse are not allowed to seize and sell the debtor spouse’s interest. They must have a judgment against both parties.

• Pros
  • Allows the survivor to work to bypass probate.
  • Safeguards the home from claims against the other tenant while alive.
• Cons
  • TE is not available in all states; and limits may apply to those where it is.
  • If one spouse dies, the surviving spouse is subject to debt or judgments that may be against them.

Ways to distribute real estate

• Distribution of property to beneficiaries, either through probate, a trust, or other methods like a transfer-on-death deed.
• Donating the home to charity.
• Giving the home to a town or local college.

Consult a financial professional

Homeownership and estate planning can be extremely complex, and it is highly encouraged that you seek the help of a financial professional.