Can You Give Away Real Property and Avoid Probate Court?

Takeaways

• When passing property to heirs, using a deed can help avoid probate court.
• However, deeds have downsides, such as limited flexibility and lack of creditor protection for beneficiaries.

If you plan to pass your home on to a family member through your will, keep in mind that your loved one will likely need to go through the court process known as probate to properly transfer the home into their name. Probate can be a costly process that may take months, even years in some cases, to complete, which is why many people seek to avoid it.

To help ensure that your loved ones do not have to deal with the probate process, one option you have is to use a deed to transfer your home that becomes effective only after you, as the owner of the home, pass away. However, be aware that using these deeds for probate avoidance can potentially introduce new issues.

Using a Deed to Transfer Real Property at Your Death

As a homeowner, you can create an estate plan to plan for what happens to your property, such as who receives it and how it’s used, after you pass away. For example, you may envision a loved one keeping the property in the family as a vacation destination for your loved ones to continue using after your death. Or, you might be planning to transfer a piece of property outright to a relative without putting any restrictions in place.

If you are hoping to avoid probate, there are multiple ways to transfer your home to someone. However, as the examples below show, they can also come with some disadvantages and limitations.

What Is a Deed?

A deed is a legal document that transfers ownership of real estate from the current owner to another individual or entity. Several types of deeds are useful in transferring real property at the homeowner’s death, including:

Life Estate Deed

A life estate deed gives you the right to live in and use your property throughout your lifetime. As the individual being granted the life estate, you are considered the life tenant. The person you name to receive the property after your death is referred to as the remainderman.

While a life estate avoids probate, it can have a few potential downsides. For example, the life tenant can only undo the life estate if the remainderman agrees. In addition, the life tenant and the remainderman may have different goals in mind for the property or may disagree over expenditures related to home improvements, major repairs, or maintenance. A life tenant cannot liquidate or sell the property without the remainderman’s agreement and is typically entitled to a portion of the proceeds based on their own life expectancy.    

Lady Bird Deed

A Lady Bird deed, or enhanced life estate deed, also allows you to continue living in your home during your lifetime. As the life tenant, you maintain the right to use, mortgage, sell, gift, and otherwise convey the property during your lifetime – without requiring the remainderman’s consent or approval.

When you die, the remainderman will then receive the property. This provides flexibility for a property owner in choosing who will receive the property at their death while still retaining control over their home      throughout their lifetime. Note, however, that this type of deed is not available in every state.

Transfer-on-Death (TOD) Deed

A beneficiary deed, or TOD deed, automatically transfers the property at your death to the beneficiary you named. You can revoke the deed at any time while you are alive. (Similar to Lady Bird deeds, not all states allow TOD deeds.)

The Downsides of Using a Deed

Your Beneficiaries Are Not Protected From Creditors

Property transferred by deed goes to the beneficiary outright, with no strings attached and no protections. The property may even be used to satisfy your loved one’s creditors because it is now considered their property.

Disabled Beneficiaries Also Lack Protection

If a beneficiary receives the property when unable to manage their affairs, its management falls to another person, such as a court-appointed guardian or conservator or an agent under a financial power of attorney. This person can do whatever they want with the property (as long as it is in the incapacitated beneficiary’s best interest).

Also, if the beneficiary receives any means-based assistance (e.g., Supplemental Security Income), the receipt of the property could potentially jeopardize those benefits.

You Won’t Be Protected If You Lose Capacity

The deeds outlined above are a sufficient way to transfer property after you are deceased. However, what if you suffer a serious injury or illness and lose the ability to manage your own affairs?

If you become unable to manage your affairs, the named beneficiary will not have the ability to help you manage the property because they will not have a current ownership interest in the property. This is because ownership does not transfer until your death. Your agent under a financial power of attorney (if you have one) or a court-appointed guardian or conservator will have to manage the property on your behalf.

Your Beneficiary Can Do What They Want

If you use a deed to transfer ownership at your death, your loved one will receive the property outright. You can’t add any additional conditions or requirements regarding the property or its use. Your loved one can sell or mortgage the home or decide  to use it as a rental property. Ultimately, their      intended use of the property may not align with your wishes.

Using a Trust to Transfer Your Home

Again, the loved one to whom you intend to pass your home may wish to sell it, rent it out, or renovate it. Perhaps you don’t have a preference as to what happens to the property once you are gone. However, if you are looking to set any restrictions or provide guidelines on how your loved ones will use your property, consider placing your home in a living trust.

The trust legally owns the property, with you as trustee and beneficiary during your lifetime. This allows you to stay in your home — and maintain control over it — while you are alive.

When you die, your home avoids probate because you do not technically own it. A successor trustee assumes legal responsibility for the property and manages and maintains it or transfers it according to your trust’s terms.

Work With an Estate Planning Attorney

While a trust offers more flexibility and planning options than a deed, it may initially cost more to set up. Estate planning is a highly personal process that considers many factors. Every solution can present a unique set of benefits and drawbacks. You may be interested in avoiding probate, but that is usually just one estate planning consideration among many.

Determining the best way to transfer real property at death depends on both your preferences and circumstances. An estate planning attorney near you can identify the best tools available to you to accomplish your goals and explain the benefits and potential risks.