Transferring real property to children before or after death

July 8, 2014 - Categories: News

QUESTION:

I am an adult child and my elder parent would like to transfer their home / cottage / cabin / other real estate to me, either near the end of their life, or at death. What are my options?

ANSWER:

There are several ways for a parent to transfer property as a gift to children. They include:

  1. Transfer by deed while living.
  2. Transfer by deed while living, but allow parent to live in and sell while living (Lady Bird Deed). 
  3. Transfer by deed to child and parent as joint owners with rights of survivorship; child owns 100% upon death of parent. 
  4. Transfer by trust to child after death.
  5. Transfer by will to child after death.
  6. Transfer by intestate succession through probate -- no will.

TRANSFER BY DEED WHILE LIVING:

A parent can transfer their property to their child, while living, by a quit claim deed which transfers the property from the parent, to the child. 

One advantage of this is that, under the Michigan Cottage Law, when a parent transfers a property to a person related by blood or affinity to the first degree, and the use of the property will remain the same, then the tax assessment will not be "uncapped" upon transfer. This could offer significant tax advantages for the child, especially if the parent has owned the property for many years. This is the only type of transfer that will not "uncap" the tax assessment values. Thus, the child's property taxes will continue to be calculated based on the assessed value that the parent's taxes were based on, rather than increasing based on the current value of the home.

Another advantage of this approach is that the child, if they live in the property can claim the Michigan Homestead Exemption, since they own the property outright. This will also ensure lower taxes.

Another advantage is that the property does not need to go through probate upon the parent's death. The child already owns the property before the parent died.

The main disadvantage is that the parent loses control of the real estate after gifting it to the child. The child can do anything they want with it then (sell it, rent it, etc), and the parent has no say.

TRANSFER BY LADY BIRD DEED WHILE LIVING, WHILE KEEPING CONTROL OVER THE PROPERTY WHILE LIVING.

A parent can also transfer a property to a child via a "Lady Bird" deed. This is a regular quit claim deed, but it gifts the property from the parent, and to the child, while leaving the parent with a "life estate and absolute power to convey" the property during the parent's lifetime.

What this means is that the parent still gets the right to live in the property until their death, and even has the power to essentially cancel the deed and sell to someone else while living, thus ultimately taking away the child's interest.

One advantage of this is the parent maintains the power to live in and sell the property if they get mad at the child.

Another advantage is that, upon death, the parent's rights of a life estate and power to sell are then automatically extinguished, leaving the entire property automatically in the ownership of the child. There does not need to be any trust, will, or probate process for the child to get the property. The child owns the property 100% upon the death of the parent.

Another advantage is that this type of deed allows the parent to continue to claim the Michigan Homestead Exemption, as long as the parent lives there and doesn't claim the exemption on any other property.

Another advantage is that the property does not need to go through probate upon the parent's death. The child owns the property automatically, by "operation of law," upon the parent's death. 

However, this can also act as a disadvantage for the child because the child cannot claim the Michigan Homestead Exemption, even though they have a future interest in the property and will own it 100% upon the parent's death. Only the person with the life estate can claim the Homestead Exemption, but if the parent is already living somewhere else, and already claiming the exemption, then neither the parent or child can use the exemption on this house. 

TRANSFER BY DEED TO PARENT AND CHILD AS JOINT-OWNERS, WHILE LIVING:

A parent can transfer their property from themselves, to the parent and the child as joint-owners with rights of survivorship. This would typically be done by a quit-claim deed.

One advantage of this is that the parent can remain living in the home, and enjoy ownership of the home while living.

Another advantage is that either parent or child (whomever is living in the home) can apply the Michigan Homestead Examption to the home, assuming that person has not already used it for another property.

Another advantage is that, upon the parent's death, the child will then own the property 100%, without the need for a will, trust, or probate process.

Another advantage is that the child's creditors cannot force the sale of the property to satisfy the debt of the child, as long as the ownership is as "joint tenants with rights of survivorship."

Another advantage is that, upon the death of the parent, the child's taxable value does not become uncapped, so the children will continue to own the property without a new taxable value.

Another advantage is that the property does not need to go through probate upon the parent's death. The child owns the property automatically, by "operation of law," upon the parent's death. 

A disadvantage is that the parent and child must jointly agree to sell the property, rent the property, or make other decisions about the property because they are, indeed, joint-owners with equal rights.  

TRANSFER OF PROPERTY TO CHILD BY A REVOCABLE TRUST

A parent can transfer their property from themselves, while living, to their Revocable Trust, and then direct in the Trust that, upon the parent's death, the property will be given to the child.

A Revocable Living Trust is a document, similar to a will, that allows someone to direct how and to whom they want their assets given upon death. 

One advantage of a trust is that the parent can, while living, specify who they want to receive their property upon death. This ensures that the property does not go to the state accidentally, if there is no will and if no heirs ever try to claim the property.

Another advantage of a trust is that the parent can, while living, always change the trust, so if they get mad at the child, they can just change the terms of the trust.

Another advantage is that the parent can simply remove the property from the trust. If the property was never put into the trust (deeded to the trust), then the child will still not get the property, even if the trust said they should. Again, this gives the parent control over the property in case they get mad at the child, or just change their mind.

Another advantage is that the trust and its assets, unlike a will, does NOT need to go through probate. The parent designates who they want to be the "Trustee" upon their death, and that Trustee then has the responsibility to give the property in the trust to the right people designated by the trust. Therefore, if the house is in the trust, and the trust says that the child gets the property upon the parent's death, then the Trustee must give the property to the child. There is no court action necessary.

A disadvantage of a trust is that parent's sometimes forget to deed the house into the trust, thus making the trust provision of the home of no effect. This is easily overcome while the parent is living.

Another disadvantage of a trust is that the property tax will be "uncapped" upon the transfer to the child. Thus, the child will likely pay higher property taxes than what the parent's paid on the same property.

TRANSFER OF PROPERTY TO CHILD BY A WILL

A parent can designate in a Will that, upon their death, the property will be given to their child. 

A Will is a document, similar to a Trust, that allows someone to direct how and to whom they want their assets given upon death. However, the Will must go through the court probate process in order for a Personal Representative (rather than a Trustee) to be appointed. Once appointed, that PR can then follow the parent's wishes and disburse the property to the right beneficiaries. 

One advantage of a Will is that the parent can, while living, specify who they want to receive their property upon death. This ensures that the property does not go to the state accidentally, if there is no Trust and if no heirs ever try to claim the property.

Another advantage is that the parent can simply change the provisions of the Will while living, and direct that someone else (not the child) will get the property upon the parent's death. This gives the parent control over the property in case they get mad at the child, or just change their mind.

Another advantage of a Will is that all property not handled through one of the other methods will automatically go into the estate, and be covered by the Will. Unlike a Trust, the parent does not need to remember to deed the property into the estate -- it is automatically "in the estate" unless put in a trust or deeded through one of the above methods. Thus, a Will can be helpful to make sure any property not put into a Trust are still given to the right people that the parent chose to get those assets.

A disadvantage of a Will is that, unlike any of the other above methods, the Will and its assets MUST go through probate. The probate process can sometimes be expensive, time-consuming, and complex. However, a properly written and executed will can significantly reduce the costs and complexity of the probate process.

Another disadvantage of a Will is that the property tax will be "uncapped" upon the transfer to the child. Thus, the child will likely pay higher property taxes than what the parent's paid on the same property.

TRANSFER OF PROPERTY TO CHILD BY THE LAWS OF INTESTATE SUCCESSION

The worst way to pass property to a child is by the laws of intestate succession.

Under the laws of intestate succession, if a person dies without a will, trust, or a proper deed that gives the property to someone else, then the property (and all other undesignated assets) will go into the "estate," and state law decides who gets what.

State law says that the property of a parent will go in this order: 1) to the spouse, if living; 2) to the children, if no spouse; 3) to the parents, if no spouse and no children; 4) to the brothers and sisters of the deceased, if none of the above are living, etc.

However, in order for any of the above family members to get the property, the somone must open a probate estate, get assigned as a Personal Representative, and then distribute the property according to the laws of intestate succession.

One advantage of this "do nothing and let the state decide" route is that there is at least a way to get property into a family member's hands, even if there was no trust, will, or properly created deed.

Another advantage of this process is that all property not handled through one of the other methods will automatically go into the estate, and be covered by the laws of intestate succession. Unlike a Trust, the parent does not need to remember to deed the property into the estate -- it is automatically "in the estate" unless put in a trust or deeded through one of the above methods. Thus, if there is only a Trust, but no Will, and the parent forgets to put property into the Trust, at least there is a legal method to get the rest of the property into the hands of a family member.

Another disadvantage of this approach is that state law decides who gets that house -- your spouse has first dibs (even if you were estranged with your spouse and wanted your children to have the house). If you have no living spouse, then your children get the property. However, if you have multiple children, then they must agree on what to do with it, or fight it out in court. 

Another disadvantage of this approach is that, like with a Will, all of the assets in the estate MUST go through probate. The probate process, when there is no will, may be very expensive, time-consuming, and complex -- certainly more so than if there was a Will in place.

A final disadvantage of this approach is that the property tax will be "uncapped" upon the transfer to the heir. Thus, the heir will likely pay higher property taxes than what the parent's paid on the same property.

HOW CAN A LAWYER HELP?

A lawyer can help you by:

  1. Listening to you and learning what are your goals regarding your property, and who you would like to receive it.

  2. Explaining to you the above options more fully.

  3. Advising you as to which method above, or combination of methods, will be best for your situation and your goals.

  4. Writing a well-crafted, legally-compliant deed, will, and/or trust that will ensure that your wishes are met regarding your property.

  5. Helping you get those documents properly executed (made enforceable), filed, and stored for safekeeping.

WOULD YOU LIKE A FREE PHONE CONSULTATION WITH A LAWYER? 

CONTACT US AT 855-437-3704 OR SEND US A NOTE FROM OUR HOMEPAGE AT ACCESSLEGALCARE.COM .