Estate Planning, yes you have to think about it!


Before I can talk about real estate, I need to discuss estate planning with you first.  If you’re like most people, you understand estate planning is a good idea.  You’ve heard you should plan to avoid probate.  You may even know that estate planning ensures that your property will pass to your chosen beneficiaries as quickly and efficiently as possible, and if you have young children, you likely know that you need an estate plan to decide who will care for your minor children if you’re not around to do it.  While you probably know all of that, you’re also probably not much different from 70-80% of the population that put off devising their own estate plan to a later date.  Trust me, I get it.  My own parents are no different, they’re 70 years old and have an estate-planning attorney for a daughter and are still among the majority!

I get it because I understand that estate planning is not easy.  Not only does it force you to think about your own mortality, but it can be complicated and overwhelming and in this economy people just don’t consider spending money on legal fees a priority. 

I find the people I’ve met in my life, whether it is clients, friends, family or acquaintances, regardless of their net worth, all have a similar belief structure.  Most just don’t expect to die anytime soon, and thus miss the point of estate planning.  Until each of us realizes the probability of our own mortality, estate planning just lacks meaning and definition.

We spend a lifetime raising families, creating income, taking care of people, planning for the future, and in an instant, it can end.  Maybe I’m just pointing out the obvious here, but it’s a point worth noting. If you fail to plan before death, you’ve lost your opportunity to plan at all. 

At that point, then the state decides what to do with you estate, otherwise known as probate, and I can assure you, that process is not only costly and time consuming, it’s utterly confusing and stressful to your loved ones and it can also go completely against what you would have done had you taken the time to plan yourself. 

So when you factor real estate into estate planning, a question I often get asked is, do you always need a trust?  The answer is – it depends.

In one of my recent client meetings, my client (let’s call her Betty) divulged that she had arranged to give her house, which she currently shares with her husband, to her daughter upon her death.   Betty had recently remarried after being a widow for many years.  The house was titled in joint tenancy with rights of survivorship with her current husband.   When asked how she planned to facilitate the transfer to her daughter, she said it was explicitly stated in her will.  Unfortunately, as I pointed out, based on how the house was titled with her new husband, it would pass directly to her husband upon her death by operation of law.  Her daughter would not be entitled to inherit the house.  Betty had no idea that her will had no effect on passing the house to her daughter. 

While holding title to the property in joint tenancy accomplished one of  Betty’s goal’s, avoiding probate proceedings, it prevented her from accomplishing her most important goal, ensuring her daughter received the property she worked so hard her whole life to acquire and maintain upon her death.  Essentially title would pass to her husband and upon her passing, he would be entitled to leave it to anyone he wished, maybe he had children of his own, perhaps he would remarry, either way Betty essentially disinherited her daughter from her biggest asset. 

Joint tenancy is one way co-owners, called “joint tenants,” can own property together.  Under some circumstances, it is a useful probate avoidance tool, because property held in joint tenancy carries with it the “rights of survivorship.”  This means that when one joint tenant dies, his or her ownership share of the joint tenancy property is “automatically” transferred to, and becomes owned by, the surviving joint tenant without the need for probate.  The automatic right of a surviving joint tenant or tenants to inherit is basic to the form of ownership.  You cannot leave your property to anyone but the other joint tenants.  If you leave it in your will to someone else, as with the case of Betty, it has no effect. 

As long as joint tenants are alive, any of them can terminate the joint tenancy, whether or not the other owners consent to it.  The risk of issues arising may not be serious for couples or close friends who purchase property together with money they each contribute, because if there was a divorce, separation, or other reason to end the joint tenancy, each joint tenant would simply get his or her fair share.  However, if solely owned property is transferred into joint tenancy by either a parent or a child in the form of a gift, the situation becomes quite different. 

Just recently I met with a client who transferred her Cape home on the beach to her mother as joint tenants for the sole purpose of mom being able to get a beach sticker. 

By transferring title to mom, not only has my client given up ownership of half the property, she has opened herself up to mom’s potential creditors, if any (and vice versa).  And unlike putting property into a living trust, she can’t change her mind later and just take it back.  Luckily for her, she absolutely trusts her mother and trusts that she would never sell the property or do anything with the ownership that is adverse to her own interest, but that’s not always the case with others because you just never know.   Also, if my client passed before mom and mom is ever later in need of long-term care and doesn’t have the liquidity to pay for a hefty monthly nursing home bill, the full value of the Cape home could be includable in her Medicaid estate, potentially disqualifying her from receiving any potential benefits she would have otherwise been entitled to.

Typically, creditors or any joint tenant may go after that tenant’s individual interest, but a court may order the whole property be sold to the reach the debtor’s share.  Generally, upon the death of one owner the surviving owner takes the property free of any responsibility for the deceased’s debts.  But, in a number of states, a creditor of the deceased owner can go after the property if the deceased person had pledged his interest in the property as security for a loan; the creditor sued, got a judgment, and initiated legal steps to collect the money before the deceased died; or the creditor can show that the joint tenancy arrangement was a scheme set up solely to defraud creditors.  If you have any doubts about your potential joint tenant, joint tenancy isn’t for you.

A living trust may be a better way to transfer property ownership.  To eliminate the risk of giving property to someone in joint tenancy who would then sell his or her interest in the property or turn into someone you don’t get along with, I advise people to create a living trust.  Then name whomever you want as beneficiary for the house.  If you have a falling out later, you can simply amend the trust and change beneficiaries.  Until the death or disability of the trust creator, the trust property can be managed, bought and sold as before.   If a trustee becomes incompetent and unable to manage affairs, the alternate trustee (for example, it could be a spouse or adult child) takes over management of the trust assets. When the settlor (the person setting up the trust) dies, the living trust assets are distributed according to the trust’s terms.

In the case of Betty, I would have advised she place her home into a trust granting her husband the right to use and occupy the property for his life, being responsible for the maintenance and upkeep during his occupancy and upon his death, her daughter would receive the property outright, free and clear. 

Finally, one of the biggest mistakes anyone can make is to consider only the probate avoidance aspect of a particular action or strategy while failing to consider other factors and “sleeper” consequences that almost always result. The pitfalls of these alternative techniques are less obvious and harder to understand because they cut across many complex and distinct areas of tax law, property law, creditor, and liability law — of which many are generally unaware or unmindful of.  Any successful probate avoidance technique needs to also maintain maximum tax advantage as well as maximum protection for you and for those you wish to eventually receive your estate. It is there that alternative probate avoidance methods typically fail in such hidden, miserable and costly fashion. A living trust will allow you to avoid probate while maintaining maximum tax advantage, flexibility privacy and protection for yourself.

If you decide to transfer your property into a living trust, you will need to change the property’s title to reflect the ownership change.  In addition, the following are frequent concerns my clients often ask me about:

  • Mortgage interest deductions: As the grantor (same as settlor), you can still deduct mortgage interest from your income taxes.
  • Transfer taxes: Transfer taxes are normally assessed on real estate transfers. When the transfer is to a living trust, these taxes are usually not imposed. However, some states do tax living trust transfers. You should check with your County Assessor or Recorder’s Office to confirm that you will not need to make these payments.
  • Property tax reassessment: If you designate yourself as the trustee, most states will not require a tax reassessment when you transfer property into your trust.
  • Insurance policies: If you are the trustee, you do not need to change the registration of insurance policies if those policies cover property in the revocable trust.
  • Tax breaks for the sale of a home: You can exclude up to $250,000 of profit from your taxable income when you sell your principal home, even if the trust owns the home. If there are co-owners, such as spouses, this exclusion is doubled to $500,000.
  • Due-on-sale clauses: A lender cannot enforce a due-on-sale clause if you are transferring your principal residence to your trust. If you are concerned about this, you may want to get your lender’s consent before making the transfer.
  • Partial interests: You can transfer a partial interest in real property to the trust (like a time share or an ownership percentage).

In closing, through my personal experience I’ve noticed that people generally manage their lives quite well but leave things in an utter mess when they die.  The government and the legal system do not profit unless your affairs are disorganized and vulnerable to an exorbitant tax bill.  The best time to have planned your estate is yesterday; but if you failed to complete your planning yesterday, then today is the second-best time to start!

Attorney Artika Wadhwa is owner of the Estate and Elder Law Advisory LLC, a full service estate planning firm serving southeastern MA & RI.  EEPLA specializes in estate planning, tax and business planning, real estate law, probate and wills and trust work. Attorney Wadhwa is a Geo affiliate and friend who welcomes your questions. You can reach her via email at or via phone at 781-603-7427.