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Home Ownership and Estate Planning
By: Martin M. Shenkman, CPA, MBA, JD
Money Matters Radio Network Checklist: How Ownership (title) Affects your estate Planning
Introduction: How you own your house can affect your estate plan. Too often people don't understand the impact of exactly how they own their home and what it means.
Probate: Joint ownership with rights of survivorship can avoid probate. This is not always the best answer as you have to weigh all factors. If you have a vacation home in a state other than where you live the cost and hassle of probate might weigh in favor of using a trust or other arrangement to avoid this.
Liability Protection: If you own a house jointly with your spouse in some states (NJ and NY) it has a special measure of protection and is called Tenants by the Entirety. This is not, however, available in all states (e.g., CT). State law is key. Also, even in states that afford some protection for a home owned as tenants by the entirety, that protection varies by state and in many cases is not as safe or strong as some think. If your cannot own your home as tenants by the entirety and one spouse has more liability exposure than the other you can transfer the house (for non-married partners there may be a gift tax). There are also creative uses of trusts and other techniques to safeguard your residence. If you're older and retired you might be less concerned about liability. If you're younger and have many years of work left liability protection may outweigh possible estate tax savings considerations.
Estate Tax: Many married couples own their homes jointly but should own their homes as "tenants in common" so whichever spouse dies first their ½ of the house can be bequeathed to a special trust under their will to benefit the surviving spouse but to keep the house out of the survivor's estate. If Congress enacts portability of the estate tax exclusion this won't be necessary. Don't forget many states have much lower thresholds for estate tax then the federal government's $3.5M (e.g., NJ $675,000). So for many homeowners, owning their home as tenants in common might be worthwhile to save state estate tax even if they are not subject to a federal estate tax.
Property Tax Credits: If you can qualify for a property tax break weight the benefit to the loss of other planning ideas above. Some people sacrifice significant asset protection nor other benefits for what sometimes amounts to only a few hundred dollars a year.
Ancillary Considerations: However your house is owned (titled) be certain that:
Your property, casualty and liability insurance properly list the owners. If a trust or entity (such as a limited liability company) owns your house to achieve other planning purposes be certain that the trust or entity, as well as the trustees, members and others living in the house (e.g., beneficiaries) are all properly listed and covered.
If you change or transfer ownership (title) of your home to a trust or entity have your real estate lawyer address title insurance.
If you are considering a gift or other transfer of your house and you have a mortgage you will need lender approval.
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