Articles Posted in Real Estate

the-beach-beds.jpgThe weather this time of year inspires many to contemplate warm, sunny escapes. For some, this involves a timeshare property. While timeshare rights may not be as valuable as outright ownership, it is nevertheless worthwhile to consider your timeshare in planning your estate. If you have a living trust, this means taking the necessary steps to ensure that you’ve properly funded your timeshare holdings into your trust.

For many Wisconsinites who own timeshares, the timeshare property is located outside the state. In these types of situations, using a living trust as part of your estate planning can provide significant benefits. With a properly funded living trust, you may avoid probate on all your funded assets. Without it, your estate must undergo the probate administration process in each state where you own property, which would include Wisconsin, along with the state where your timeshare is located, in addition to any other states where you have assets.

This could place your loved ones in the expensive and time-consuming position of managing probate both in Wisconsin and some distant jurisdiction like Florida, Arizona or Hawaii. While timeshares may have limited value, and sometimes may be dealt with using a summary probate process, the process is still often expensive. Cumulative costs (including attorney’s fees) can total into the thousands of dollars for each probate process.

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house.JPGWisconsin law defines a number of ways an individual can own and distribute real estate. Each method offers its own unique set of advantages, and may be more or less valuable to you depending on your circumstances. Having a basic understanding of these may offer real value to you in deciding whether to keep or change the current ownership structure of your property.

Some ways are: fee simple, joint tenants with rights of survivorship, joint marital property, tenants in common, life estate, mineral rights, easement, in trust, for a term of years, ground lease, and they go on.

One well-known method is joint tenancy with right of survivorship. Under this arrangement, each co-owner possesses an equal share of the property and, upon the death of either co-owner, the other takes full ownership of the property automatically. On the “plus side,” this arrangement is simple, low maintenance and, in most situations, effective for avoiding probate (on that property). This arrangement also has downsides, in that the property may be at risk of litigation by the creditors of either co-owner and a risk exists with regard to accidental disinheritance of some family members, particularly children of a previous marriage.

Many people own real estate as “tenants in common.” This means that they all share in ownership of the property like joint tenants, but if one of them dies, their share does not go to the other owner(s). The dead person’s share is transferred according to that person’s estate plan (will or intestate succession).

Another method available is the transfer-on-death deed. A transfer-on-death deed allows you to name a beneficiary who takes ownership of the property upon your death, but has no present ownership interest in the property. This means that you retain full control of the property during your lifetime, and you can change (or even revoke) the beneficiary designation as often as you want as long as you are alive and competent. This method also generally avoids probate. Similar to the joint tenancy with right of survivorship, transfer-on-death deeds can sometimes lead to unintentional disinheritances, especially if you change your will or trust but overlook making a companion change to your transfer-on-death deed. Additionally, the beneficiary has no legal authority until you die. So, if you become mentally incapacitated, and you have no durable power of attorney for finances, you will need a guardianship established so that someone may continue to manage your property for you.

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deed.JPGAs people seek out ways to avoid the expense and delays that may be associated with probate administration, they may latch onto some “creative” methods for accomplishing this goal. One such method is a technique often called a “vest pocket deed,” or just “pocket deed,” and while it may seem extremely advantageous in terms of both avoiding probate and maintaining total control during one’s lifetime, it is actually filled with serious risks.

A pocket deed is a colloquial term referring to a deed that the property owner executes during their lifetime, but keeps in their figurative (or, in some cases, literal) vest pocket until death, and only after which is the deed recorded with the Register of Deeds. The intent behind such a method is usually two-fold. One, the method will avoid probate, because the owner signed the deed transferring the property within his/her lifetime, the property legally was not part of that person’s estate at the time of death, meaning that property was not subject to probate administration.

Two, the method offers the original owner total control, because no one recorded the deed, the relevant public records continued to show the original owner as the current one, and they could continue to manage and control the property as if the deed did not exist. If the owner changed his mind regarding any aspect of the transfer, he could simply destroy the deed and nullify the transfer.

The method contains may potential dangers, however:
Your continued control may not be guaranteed. If someone discovers and records the deed, then the transfer becomes effective immediately and the person to whom you transferred the property becomes the record owner of the property, and may chose to sell the property, mortgage the property, or evict you.
The pocket deed may cause problem for your loved ones. A possibility exists that the potentially long gap in time between execution, delivery and recordation may create a cloud on the title on the property. That means that title insurance companies may not write insurance for the property which, in turn, makes your transferee’s title to the property not marketable unless they engages in a legal proceeding to clear up the cloud on the title.
The pocket deed may cost your loved ones money. If the person to whom you leave the property ultimately sells it, they will pay more in taxes as a result of the pocket deed. The pocket deed means the transfer was legally one that occurred during your lifetime, not upon your death. As a result, your transferees will not receive a full “step up” in tax basis when they receive the property, which in turn, means that the amount of capital gains taxes they will owe upon the sale of the property will be higher than if they had legally received the property at the time of your death.

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Farmstead.jpgBeware the do-it-yourself “simple,” “efficient” estate plan. While simplicity and efficiency are valid objectives, it is important not to create unnecessary risk just so that you can save a few dollars in the short term. One risk that many people take is adding a co-owner to their real property trying to simplify the transfer upon their death. While often relatively fast and easy, this method potentially exposes both them and their loved one to avoidable risk.

When property owners say they want to “add someone” to the deed of their real property in order to create an easy method of passing the property, they often mean that they wish to create a joint tenancy with that other person. In many cases, this process occurs without a hitch. The original owner dies, and the person “added” takes over as the new sole owner of the property.

However, creating a joint tenancy of real property as an estate planning tool has many potentially negative ramifications, especially if the property is your home. This method is a completed transfer under the law, and that carries multiple consequences. One consequence relates to capital gains taxes. Taking ownership through this method, instead of inheriting the property, may cost the loved one a sizable portion of the potential “stepped-up basis” in the property. When he/she sells the property, he/she will owe capital gains taxes. Those could have been completely avoided if the property had been inherited.

Also, if a person “adds” a loved one, and he/she pays nothing, that is a gift. That can have certain impacts when it comes to estate and gift taxes, as well as income taxes for your loved one. Furthermore, if the gift giver needs to apply for Medicaid in the future, this gift may make them ineligible to receive Medicaid benefits for a period of several years, even if they are otherwise poor enough to qualify. As they say, “no good deed goes unpunished.”

Beware that if you “add” someone, that person is a co-owner and has all the legal rights and obligations that you have. They can sell their share or mortgage your house, and if your loved one gets sued successfully, his/her creditors could go after the property. If they declare bankruptcy, the property may need to be sold to pay their creditors.

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Money-By-Public-Domain-Photos.jpgOver the last several years, authors have expended much ink discussing the topic of probate and, specifically, avoiding probate. Today, with the continued evolution of the law, in Wisconsin and elsewhere, you have more choices than ever if you want to create an estate plan designed to avoid probate.

Using the probate process can be helpful in some circumstances. For example, opening a probate estate creates a specific deadline date by which time all creditors must request payment or forfeit their claims. If these types of creditor issues are not a significant factor for you, then you may decide that probate’s advantages are too few, given the drawbacks. Even a relatively simple and straightforward probate administration can take many months and cost thousands of dollars. Additionally, probate cases are public records, and anyone may view them.

For those seeking to avoid probate, many vehicles exist to accomplish this end. A revocable living trust offers many potential benefits to address a variety of issues. The process of “settling” a living trust (which means distributing the trust’s assets upon the occasion of the creator’s death,) does not require court intervention and is not a public record. This means, that, if many cases, distributing your assets using a trust may often be more private, less expensive and less time consuming than using the probate process.

In addition to trusts, other tools exist to pass assets outside probate. The law allows you to place “pay-on-death” or “transfer-on-death” designations on many assets, like bank accounts, stocks and bonds. These designations work like a life insurance beneficiary designation. The beneficiary only needs proof that he/she is the beneficiary, and that the owner is deceased, in order to take ownership of that asset.

Additionally, since 2005, Wisconsin law permits owners to place a transfer-on-death designation on real property. To accomplish this, the owner records a “transfer-on-death deed” with the appropriate county’s register of deeds. These deeds are fully revocable during your lifetime. You may either record a new deed or simply revoke the transfer-on-death designation. The law does not require you to notify the beneficiary before revoking the designation. Transfer-on-death deeds may be useful for consumers who have homes, or other real properties, of significant value, but little else in their estates.

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