|
Real Estate &
Timeshares
In General
Types of Real Property Ownership
Single Ownership:
Fee Simple
Co-Ownership:
Tenants In Common
Joint Tenancy with
Rights of Survivorship
Tenancy by the Entireties
Maintaining Good Title
Quitclaim vs. Warranty Deeds
Transferring Encumbered Property
Types of Encumbrances to Look For
Out of State Deeds
Personal Residence
Property and Casualty Insurance
Homestead Exemptions
Recording Issues
Witnesses and Notaries
Who the Deed is Returned to
Purchasing Property in the Name of a
Trust
Trustee's Powers
Special Language Requirements
TODs
Special Issues Pertaining to Medicaid
Timeshares
Ownership by
License
Ownership by Lease
Ownership by Deed
Leases
A Caution
Appreciation and gratitude is extended to Mr. Kevin
Purcell, Esq., who generously contributed the research and content
for parts of this Legal Bulletin.
IMPORTANT NOTICE TO USERS:
The information contained in this legal bulletin is general in nature and
does
not constitute legal advice. Non-attorneys should consult
with a qualified estate planning attorney regarding any trust funding matter.
Issues of state law may contradict any information contained herein.
Accordingly, the information contained in this legal bulletin and on our web
site should not be relied upon without first confirming with a qualified
attorney that the legal requirements in a particular state are satisfied.
This web site, our products and services, and any accompanying resources
are
not intended to be a substitute for research, continuing legal education, or a
thorough knowledge of the law. In using any aspect of this
web site, the user, whether attorney or non-attorney, agrees to assume all
responsibility for the validity of the information contained herein.
In General: Funding
real property is not only one of the most difficult assets to fund, but also presents one
of the greatest potentials for grave and costly errors. Generally, real property is funded through the
use of a new deed. However, there are countless ancillary issues that need to be
considered before executing a new deed. This bulletin will attempt to
outline the issues that need to be considered when funding real property as well as to
identify potential pitfalls.
Types
of Real Property Ownership: Before real property can be funded, it will first be
necessary to determine how the property is owned. There are several forms of property
ownership that will vary from state to state. It will be important for
your attorney to check your state's
statutes to determine what methods of ownership are available in your particular
jurisdiction. In general, ownership can be categorized into single ownership (when only one
person owns the property) and co-ownership (when two or more people own the property).
There is only one type of single ownership which is called Fee Simple. There are multiple
types of co-ownership such as Tenants in Common (T/C), Joint Tenancy with Rights of
Survivorship (JTWROS), Tenancy by the Entireties (T/E), and Community Property (C/P).
The type of ownership and the name(s) of the owner(s) are
determined by examining the most recently recorded deed. Often the differences amongst
various types of deeds may appear to be trivial. However, a close examination of the
wording of the existing deed should reveal some minor, but significant differences in the
phrasing.
Single Ownership:
Fee Simple: The
highest form of ownership is called Fee Simple. This form of ownership occurs when only
one person owns the property. When funding real property that is owned in Fee Simple, only
the person that is the record owner of the property needs to sign the new deed
transferring ownership to the revocable living trust.
NOTE: If the owner is married, the
spouse of the owner may also need to sign the deed in order to release their dower
interest. For information about the impact of dower interests, we strongly
recommend that you your estate planning attorney.
Co-Ownership:
Tenants in Common: When
two or more people own real property as Tenants in Common (T/C), they each own a part of the
asset. For example, if there are two owners, they may each own 50% of the whole.
In other words, each
owner is presumed to own a part of the whole. They can give away their part during their
lifetime or they may leave their part to their heirs on their death. Any two (or more)
individuals can own property as T/C. There is no requirement that the owners be related by
marriage.
Joint
Tenancy With Right of Survivorship: Property that is co-owned by more than one
owner in Joint Tenancy With Right of Survivorship (JTWROS) is sometimes a difficult
concept to understand. It differs from T/C
property in that both owners of JTWROS property are presumed under the law to own 100% of
the asset. Thus, if one owner dies, their interest is terminated and the surviving joint
owner (who already owns a 100% interest) becomes the only owner of record.
Technically,
there isn't even a transfer of ownership on the death of the first joint owner.
NOTE: The
actual mechanics of JTWROS is a state specific issue that will vary from state to state.
Your estate planning attorney can advise you about how JTWROS property is
structured in your state. As a general rule however, any two (or more) individuals can own property as
JTWROS. There
is no requirement that the owners be related by marriage.
Legal commentaries have heralded the benefits of JTWROS for
years, perhaps shortsightedly. The primary benefit of JTWROS property is that there is no death probate when the
first joint owner dies. However, this argument over this advantage fails in that the property
is subject
to probate on the death of the second joint owner. Furthermore, JTWROS property affords no
protection against a disability probate on the incapacitation of either owner.
What's
worse, JTWROS property is not controlled by the client's will or trust. Thus, most
if not all, tax planning benefits will be lost when JTWROS ownership is utilized.
Additionally, there are a number of other adverse tax, creditor, and loss of control
consequences associated with JTWROS property. For these reasons, JTWROS property should
generally be avoided at all costs.
A critical issue dealing with JTWROS property is the need
to terminate its survivorship feature. If a survivorship feature remains on the property,
then the property will pass to the surviving joint owner and the estate tax planning,
creditor protection planning, and bloodline protections will most likely be lost.
CAUTION: Simply
transferring the JTWROS property into the name of your trust may not assure that
the survivorship feature is terminated. Although some states may provide for severing the
survivorship feature through a single deed, many states require the use of the "three deed
method." Under the "three deed method", the property is transferred through
the use of three deeds. CAUTION:
You should seek counsel from a qualified estate planning attorney regarding
severing survivorship features of any JTWROS property. Your attorney can
describe the mechanics and methods of severing any survivorship features in
your specific state jurisdiction.
Tenancy by
the Entireties: Some states (but not all states) allow for a form of co-ownership
of real property called Tenancy by the Entireties (T/E). It has a survivorship feature
similar to JTWROS property; however, there are some important differences.
T/E property
receives special creditor protection not available for most other forms of ownership.
If a
creditor seeks to attach the T/E property, they must obtain a judgment against both
owners. Generally, only a husband and wife can hold property in T/E
ownership. This form of ownership
provides a substantial creditor protection benefit to married couples.
Most state laws provide that transferring T/E property into
a revocable living trust will generally cause the property to be considered Tenants in
Common and the preferential creditor protection will be lost.
CAUTION:
Before transferring T/E property into a revocable living trust, we strongly
recommend that you seek advice from your estate planning attorney. Your attorney may be able to advise you
about strategies in your state jurisdiction for preserving the preferential
benefits of T/E property.
Maintaining
Good Title: When funding real property, it will be important to make certain that
the funding process has not adversely impacted on the quality of the title or
your title insurance policy. NOTE:
Your estate planning attorney can help ensure that you take steps to maintain good
title on your property.
Quitclaim
vs. Warranty Deeds: Quitclaim deeds have traditionally been the deed of choice
for most practitioners when funding real property into a trust. A quitclaim deed simply
says that the owner is transferring whatever interest they may have (and they don't
warrant they have any interest at all) to the new owner (i.e. the trust). Another type of
deed is called a warranty deed. When a warranty deed is utilized, the owner is
transferring all of their interest to their trust, and they are warranting that they have
the highest form of ownership allowed by law. CAUTION:
In the view of the title insurers with whom
we have consulted on this issue, the use of a quitclaim deed to effectuate a transfer to a
living trust will likely result in an unintentional voiding of your title
insurance policy. For this reason, the most conservative approach when funding real
property is to use a warranty deed. We strongly recommend that you consult
your estate planning attorney for help in funding real property to your
trust through the use of a deed!
Transferring
Encumbered Property: A primary concern when funding real estate is avoiding
accidentally triggering a due-on-sale clause in the properties
mortgage. A due-on-sale clause is a common provision
found in most mortgages. Changing the ownership of the property may impair a lender's
ability to foreclose on the property in the event of the borrower's default.
CAUTION: Transferring
ownership of a mortgaged (or encumbered) property will almost always result in
accelerating the due-on-sale clause contained in a mortgage.
Transferring encumbered property to a living trust can be successfully
accomplished when prudent funding strategies are utilized. Because of
pitfalls when funding encumbered property, we strongly recommend that you seek
the assistance of your attorney.
Types
of Encumbrances to Look For: Keep in mind that an encumbrance can take many
different forms. A common pitfall is to assume that, because there is no mortgage on the property,
the property is free from all encumbrances. The most
common type of encumbrance is the traditional mortgage. However, other
types of encumbrances include business lines of credit, home equity lines of credit, and second mortgages.
CAUTION: Funding real
property that contains any type of encumbrance can be catastrophic for the
owners. Always use care and diligence in helping your attorney to
determine whether any other
encumbrances exist before funding the real property.
Out of State
Deeds: A deed should only be prepared by an attorney licensed to practice law in
the jurisdiction where the property is located. Deed requirements, recording requirements,
and title standards vary from state to state. Some states may require a title search
before the property can be funded. Other states may impose a transfer tax if the property
is funded. CAUTION: Consult with
your estate planning attorney when funding out of state property to your
trust. Your attorney will be able to secure the assistance of local
counsel to help effectuate the transfer.
Personal
Residence: For a period of time, many legal commentaries recommended that trustmakers
should not fund their personal residences to their trusts. During the mid 1980's when the living
trust paradigm began to sweep the country, many state laws presented obstacles to funding
the personal residence such as a loss of a homestead exemption or exposure to transfer
tax. However, most states have passed legislation, which removes these impediments.
CAUTION: Be
careful! Not all states have eliminated all of these obstacles. Your
estate planning attorney can check your
state's statute to determine whether any consequences exist for funding a personal
residence.
Property
and Casualty Insurance: When transferring real property into the name of a living
trust, it will be important that the property and casualty insurance policy be modified to
reflect the name of the trust as an additional insured. Most insurance companies do not
charge any additional premium to add a trust as an additional insured.
CAUTION:
It is important
that the insurance company is made aware of the transfer and all requirements for
maintaining the policy are complied with. Your estate planning attorney
can help facilitate a modification to your property and casualty insurance
policy to cover your trust as an additional insured.
Homestead
Exemptions: Many states provide for homestead exemptions that exempt a personal
residence from property taxes, creditors' claims, or both. Traditionally, a homestead
exemption was personal to the owner of the property. That is, only the record owner of the
property could claim the homestead exemption. Historically, transferring real property into
a living trust would cause the property to lose its homestead status. However, most states,
but not all, have passed laws that preserve the homestead exemption when the property has been
transferred to a revocable living trust. NOTE:
Your estate planning attorney can
check your state's laws to determine what, if
any limitations may apply.
Recording Issues: Funding
real property almost always involves recording a new deed. There are a number of
important side issues that need to be considered in order to record a deed.
Witnesses and
Notaries: Each state will have different requirements as to the number of
witnesses that are required for a deed to be valid. Additionally, some may require that the
deed be notarized to be valid.
NOTE:
Whether the Notary can also serve as a witness on the deed
is also an issue that will be specific to each state's law.
Who the
Deed is Returned to: There are two options as to who can receive the recorded
deed from the recorder's office. Having the deed sent directly to the client facilitates
the funding process. However, it also does not present any opportunity for the attorney to
maintain a copy of the recorded deed as documentation in their files nor can the attorney verify that the
deed was recorded correctly. For these reasons, the more conservative approach would be to
have the deed returned to the attorney's office directly and then forwarded to the client.
Purchasing
Property in the Name of a Trust: Often, the easiest method of funding real
property is simply to purchase it in the name of the trust. Unfortunately, most clients do
not think to sign their loan papers in the name of their trust and will usually contact
their attorney only after title has already transferred.
NOTE:
Under
§603.06 of the Federal National Mortgage Association (FNMA) policy guidelines,
the FNMA will permit a revocable living trust to
qualify as a borrower provided certain recommendations are met. Contact
your estate planning attorney to confirm that your living trust meets FNMA
requirements
Trustee's Powers: A
problem often arises after property has been transferred into a living trust and the
trustmaker desires to borrow against the property (i.e. refinancing the property, home
equity loans, etc.) or when the trustmaker wants to purchase a new asset directly in the
name of the trust which will be encumbered with a loan or mortgage. The lender will
typically want assurances that the trustmaker has the ability to encumber trust property
and will usually request that the client provide documentation evidencing these powers.
The language in your trust's article on trustee's powers
will be
subject to great review in this process. Occasionally, some language in the trustee's
power section may make the lender uncomfortable. CAUTION:
Consult with your
attorney to ensure that your trust's article on "trustee's powers"
meets lenders' requirements. Your attorney can help to navigate this
issue and calm any concerns that financial intuitions may
have.
Special
Language Requirements: Some states, such as Michigan and Florida, may require
that special language be added to the face of a deed in order for the deed to be valid.
Check your state statutes to determine whether any special requirements exist.
TODs: A relatively new
method of funding real property is beginning to be explored in a number of different
states. This method is called Real Property Transfer on Death designations (TODs).
With a
TOD designation, a new deed is prepared that keeps the property in the individual name of
the trustmaker, but on the trustmaker's death, her interest passes to her revocable living
trust that is named as the TOD beneficiary. The benefit to this method of funding is that
there are no lifetime problems of exercising due-on-sale provisions. The downside to this
approach is that it does not afford any protections against a disability probate in the
event of the trustmaker's incapacity. Additionally, the TOD option is only available in a
small number of states. CAUTION:
We strongly recommend that you consult with your estate planning attorney
regarding which funding strategy is best for funding real property to your
trust.
Special
Issues Pertaining to Medicaid: In situations where a primary concern of the
client is to maximize their ability to qualify for Medicaid, some additional issues need to
be addressed pertaining to real property. Traditionally, a personal residence has received
preferential treatment under Medicaid qualifications. Although the law will vary from
state to state, some general rules do emerge. Many people have intentionally gifted a
substantial amount of their assets to enhance their likelihood of qualifying for Medicaid.
To discourage this type of intentional impoverishment, the law provides for a "look
back" period in which any assets gifted during the look back period are included in
the value of the applicant's estate. The length of the look back period is generally
thirty-six months for gifts to individuals and sixty months for gifts to trusts.
Often clients concerned about Medicaid planning will gift
their real property to irrevocable trusts, spouses, children, or revocable trusts for the
benefit of their spouse or children. CAUTION:
Care should be exercised when transferring real
property to avoid increasing the look back period from thirty-six months to sixty months.
Consult your estate planning attorney if you have concerns or questions about
Medicaid planning.
Timeshares:
In General: A timeshare is a form of
ownership in a vacation residence that lasts for a specified period of time.
When asked to
identify their assets, clients will typically tend to overlook their interests in
timeshares. How a timeshare is funded will depend on how the timeshare was created.
The
best starting point is to have your estate planning attorney review copies of all documentation in
your possession regarding your timeshare. An examination of the documents should identify
how the timeshare was created.
Types of Timeshares: Timeshares are
created in one of three different methods: license, lease, or deed.
Ownership by License: Ownership of a
timeshare created by a license typically gives the owner the right to use a vacation unit
at a specific resort during predetermined time during the year for a specified period of
years. If the timeshare is created by a license, the license agreement needs to be examined
by your estate planning attorney to determine whether there are any restrictions that would prevent it from being assigned.
Some license agreements may require the consent of the company that owns the resort to
provide written consent in advance of any assignments. Your estate planning
attorney can contact the
resort company to determine what procedures they require and, if necessary,
obtain their written
consent to the assignment. Your attorney can also create an Assignment of
Timeshare to effectuate the transfer to trust. CAUTION:
Due to the complexities of time shares, we strongly recommend that you consult
an estate planning attorney with experience in trust funding for help with
facilitating this process.
Ownership by Lease: Ownership of a
timeshare may also be created by a lease. The primary method of funding this type of
timeshare is through a new lease. Your estate planning attorney should
review the original lease for any restrictions that would prevent it from
being assigned. Some lease agreements may require the consent of the company that owns the resort to
provide written consent in advance of lease transfer to the trust. Once
consent (if necessary) is obtained, a new lease then needs to be prepared that transfers the
interest into the name of the trust. If the timeshare is located out of state,
your estate planning attorney can secure local
counsel to prepare the lease and assure that it conforms with all state
laws. The lease should be recorded in the county where the timeshare is
located. CAUTION:
Due to the
complexities of time shares, we strongly recommend that you consult your estate
planning attorney for help with facilitating
this process.
Ownership by Deed: Ownership of a
timeshare may also be created by a deed. The primary method of funding this type of
timeshare is through a new deed. Your estate planning attorney should
review the original lease for any restrictions that would prevent it from
being assigned.
Some deed agreements may require the consent of the company that owns the resort to
provide written consent in advance of deed transfer to the trust. Once
consent (if necessary) is obtained, a new
deed then needs to be prepared that transfers the
interest into the name of the trust. If the timeshare is located out of state,
your estate planning attorney can secure local
counsel to prepare the deed and assure that it conforms with all state
laws. The deed should be recorded in the county where the timeshare is
located. CAUTION: Due to the
complexities of time shares, we strongly recommend that you consult your estate
planning attorney for help with facilitating
this process.
NOTE:
Some lease agreements may require that a title
search be performed prior to assigning the lease. It is also not uncommon
for a lease
agreement to require that the title search be conducted by a particular title company.
This
process can be expensive and may cost in excess of a thousand dollars. However, some resort
companies will waive the title search requirement if the new lease is prepared by their
legal counsel. Although the cost of their attorneys preparing the new lease may range from
$300 to $800, it will still result in substantial savings to the client as opposed to
performing a full title search.
Leases: Funding a lease is done in a similar manner
as funding real property. Instead of using a deed, an Assignment of Lease of
Real Property is utilized. NOTE: It is
only necessary to assign a lease of
real property is when the Trustmaker (i.e. the client) is the grantor/lessor.
If the client is the grantee/lessee, then the lease is considered a debt and
debts generally are not funded.
Although each state will have different requirements as to
the formalities required with witnessing and notarizing a lease, we recommend that the lease be witnessed and/or notarized to the same extent as
would be necessary under your state's laws for signing a deed. Additionally,
your state may have different requirements as to whether a lease must be
recorded in order to be valid, based on the length of the lease. It is not
uncommon for leases of 12 months or longer to need to be recorded in order to
be valid. CAUTION: Due to the
legal complexities of leases, we recommend that you consult your estate
planning attorney. Your attorney will be able to counsel you on the
issue of leases.
A Caution:
CAUTION!
If the property is encumbered by a lease,
there may be provisions within the lease that give the grantee/lessee various
rights (i.e. first right of refusals, etc.) upon the sale or transfer of the
subject property. Thus, it would be prudent for your estate planning
attorney to review the original lease
agreement to determine whether any such restrictions exist. If your
attorney discovers
that such a restriction exists, you may be able to modify the original lease
agreement by mutual consent of both parties. Again, consult your estate
planning attorney for guidance.
Find
an Attorney with trust funding services
:
|
