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A primary residence is often a family’s most valuable asset. A couple living in their house for many years may well have paid off their mortgage and built up tremendous equity in the property. And this equity can benefit a surviving spouse or children in the future—especially if the property can be passed to them easily and affordably.
When Does a House Need To Be Probated?
Probate is generally required for assets owned in your name individually when you pass away. For your house, this could happen when the Deed of your house is in your name at the time of your death. For married couples that own a house together with rights of survivorship, the main concern arises when the second spouse passes away, or if both spouses were to perish together (ex: a car accident).
Exceptions to this rule include when the house is owned by an entity (such as a trust or business), when the house is owned by two or more people with rights of survivorship, or when a beneficiary deed is properly recorded prior to death.
What Happens to a House During Probate?
Failing to plan ahead can tie up your real estate in probate, which may mean a long and costly transfer processes. The main issues that come up are the various delays and expenses that impact beneficiaries.
Probate’s Impact on Children of the Deceased
Difficulties Executing the Will
Children responsible for executing a will may have to endure a significant time lapse between when the house goes into probate and when they can sell it to distribute the proceeds. Here in AZ, creditors are given up to four months from when the probate is opened up to submit their claims to the estate – meaning the minimum time a standard probate will take is four months.
Delays in Receiving the Proceeds
If children are the inheritors of the property, this delay in receiving the monetary proceeds of a home’s sale may impact their own lives. The home may even depreciate in value while in probate.
How to Transfer a House or Property Without the Cost of Probate
Make sure you understand how to avoid the frustrations of probate. In this section, we will show how to keep clear of this situation with estate planning – and we encourage all families to take the time to properly plan the future of their most valuable asset.
First, use estate planning to prevent probate on a house
As you consider the details of your estate plan, there are a few important steps you can take to sidestep the probate process on a home or property.
Place the House in a Trust
Pace a home into a trust all you (the grantor) to give power over the property to a third-party trustee. This trustee manages the property for the beneficiaries for as long as directed. In the case of a living trust, you will be the grantor, trustee and beneficiary all at once. This allows you to retain control over the property for as long as your are alive and have capacity. Once you lose capacity or pass away, the successor trustee you name will step in to take care of the house. A properly drafted trust will also allow you to maintain various property tax exemptions.
Create a Beneficiary Deed
In Arizona, state law recognizes the enforcement of a Beneficiary Deed. In some states, these are commonly referred to as Transfer on Death Deed or Lady bird Deed. These property deeds allow you to occupy and control a property while alive and then pass the property to be designated beneficiaries upon death.
Ask Us Which Option is Right For Your Estate
Creating a living trust is a good option for avoiding probate for most middle to upper income families, but not always on small estates. On the other hand, living trusts also allow you to maintain control over the property and establish rules for it’s use even after you pass away – something that cannot be accomplished with a Beneficiary Deed.
AVID Esq. Group LLC will be able to help you decide whether a living trust or beneficiary deed will work best for you and your family members. Call us today for a free consultation!
Avoid These 3 Mistakes Regarding Home Inheritance
1. Never List a Joint Owner on a House You Want Another Party to Inherit
A joint owner with rights of survivorship (JTWROS) will inherit an entire property when his or her co-owner passes away. This can completely ruin an estate plan if the joint owner is not the intended beneficiary. If you are concerned about maintaining the property yourself, name a trusted individual as your financial power of attorney to assist you. It will save effort, cost, and time if the house is given to those you intended to received it.
2. Consider Big Tax Consequences If You Transfer or Gift a House During Your Lifetime
If you do so, your beneficiary will not benefit from the “stepped-up in basis” of the asset upon your death. For example, imagine you purchased a house 40 years ago for $100,000, and it is worth $450,000 today. If you pass it to a beneficiary as an inheritance, the house will have a $450,000 tax basis. If it appreciates in value over the next few years to $500,000 and your beneficiary sells at that time, he or she will owe capital gains taxes on only the $50,000 value increase.
However if you gift the house to this individual during your lifetime instead, the home’s tax basis will remain at $100,000. Selling it a few years later for $500,000, your surviving spouse or child will need to pay a capital gains tax on the $400,000 value increase.
3. Do Not Ignore the Impacts of Real Estate on Medicaid (ALTCS)
Here in Arizona, Medicaid is referred to as Arizona Long Term Care System (ALTCS). This system provides long term care for individuals 65 years and older.
ALTCS excludes your primary residence when calculating your ALTCS eligibility. However, ALTCS can seek to recover against a ALTCS recipient’s probate estate. This could cause a house to be sought by ALTCS. A good estate planner will recommend strategies to ensure ALTCS eligibility while preventing ALTCS recovery against the house.
