How to Avoid Probate of the Homestead or other real estate

In my last blog post, I discussed the pitfalls of real estate having to go through the probate process.  Even though we learned that a homestead is protected, in Florida, in most situations from creditors’ claims, there may still be reasons to avoid probate of the homestead.  What is the biggest reason?  Attorney’s fees and costs.

A probate of just the homestead property could cost (depending on what county you live in) from $1,500 to $2,500 in attorney’s fees and costs, and sometimes more.  So how do you avoid those fees and costs?  There are several ways to avoid probate of real estate:

1. One common (but not so smart) way to avoid probate, is to either add someone to the title as a joint owner, or give them the property outright during your lifetime.    However, the problems with doing this include:

  • Creditors’ claims of person you added – by adding this person to your property (or gifting it to them outright), you have now subjected the property to their creditor’s claims.  For example, if you add your adult child to the title of the property, it may be your homestead, but if they are not living on the property, it is not their homestead.  And, if they have to file for bankruptcy, or they are going through a divorce, their creditors or soon-to-be ex-spouse may have the right to go after their half of the real estate.
  • Elimination of “step-up in basis” – by adding someone to the deed on your house or giving them the property outright, you have eliminated the “step-up in basis” they would receive at your death.  In other words, when I die, if I leave the house to my child, she will inherit the property at the value it is on my date of death.  But if I add my adult child to the deed, she takes the property at the value that I paid for it.  If she goes to sell the property after I die, and the property is worth $100,000 more than what it was when I bought it, she will have to pay capital gains tax on the increase in value.  But if she inherits it (either via  a probate or some other way), she will inherit the property at what it is valued on my date of death – so, there will be no capital gains tax to pay on the increase in value.
  • Gifting – by adding someone to the deed on your house or giving it to them outright, you have created a gift.  This is important for Medicaid planning purposes because, if you are elderly and you have added a child to the deed to your house, and then a year later, you need to go into a nursing home (and have Medicaid pay for it), you will have disqualified yourself from Medicaid benefits which pay for nursing home care because of the gift you made.  There is a five year look-back period for Medicaid benefits which pay for nursing home care and any gifts made during the five years before you apply for Medicaid very likely will disqualify you from receiving benefits.  Gifting the house may also cause you to have to file a gift tax return (which is the subject of another blog post someday soon).

 
2. Another way to avoid probate with real estate is to have a Revocable Living Trust (also sometimes referred to as a “Revocable Trust”, or a “Living Trust”.   A Revocable Trust is a document which you create and it helps you to manage property both during your lifetime and at death.  It is particularly useful if you own property in more than one state (because probate in more than one state = attorney’s fees and costs x 2).  In order for the trust to work, however, you must “fund” it which means you must transfer the title to property into the name of the trust  and this is where many people make mistakes because they think that, once they have created the trust, their work is done.  If you do not transfer the property into the trust, your family will still have to deal with a probate at your death.  Also, in Florida, if you have minor children, transferring your homestead into a revocable trust will not work to avoid probate because Florida law prohibits the devise of a homestead (either via a Will or Revocable trust) if the owner is survived by minor children.  If you have minor children, you can use an irrevocable trust to transfer the homestead but that is beyond the scope of this blog post (and this, too, is an issue for another future blog post).
 
3. A final way to avoid probate of Florida real estate (including the homestead) where you are not seeking to leave out your spouse or a minor child is to execute an Enhanced Life Estate Deed (also known as a “ladybird” deed).  Essentially, the deed has language in it that says you are giving yourself a life estate in the property, but you are retaining the right to mortgage, sell, rent, do whatever you want with the property and, at your death if you still own it, the remainder interest goes to whomever you list (could be your adult children, another family member, whomever you want subject to the Constitutional restrictions).  As with anything else, there are pros and cons to an Enhanced Life Estate deed:
 

  • Pro – it avoids probate at your death.   At the death of the life tenant, the remainder person(s) record the death certificate of the life tenant and the property is now in the names of the remainder person(s);
  • Pro – the remainder person(s) receive a “step-up in basis” as discussed above (i.e., capital gains tax are none or minimal if they sell the property shortly after the decedent dies);
  • Pro – you have not gifted the property by signing the Enhanced Life Estate deed because you have retained the right to sell the property during your lifetime, so you do not affect Medicaid benefits for nursing home care (i.e., you do not trigger the 5 year look-back period).
  • Con – although there is language in the ladybird deed that states that, if you choose to sell the property or change the deed later you do not need the consent of the remainder person, many title insurance companies may still require the remainder person to consent, especially if you are refinancing or obtaining a new mortgage.
  • Con – if one of the remainder persons passes away before the life tenant, their interest is considered vested and, at the death of the life tenant, the interest of the remainder person must be probated
  • Con – since the remainder interest is considered a vested estate then any judgment liens or tax liens against the remainder person will attach to the property so that when the property is sold or mortgaged, the liens must be paid off.

As I always tell my clients, there are pros and cons to any type of estate planning that you want to do.  You need to decide which is best for your situation, and you should always consider using an estate planning or elder law attorney to help you make the right decision for you.

 

Laurie Ohall is a board certified elder law attorney practicing in Brandon, Florida.  Contact Ms. Ohall today if you are in need of estate planningelder law, probate or guardianship assistance.

By |2014-04-08T12:37:46+00:00April 8th, 2014|Categories: Estate Planning, Probate|0 Comments