Real estate continues to be a popular investment for individuals and couples.
An investment property may also serve as a personal residence. Other real estate holdings may include rental properties, vacation homes, commercial buildings, farms, or undeveloped land.
Whatever the property type, real estate can be owned and transferred in several ways. Each method has important legal consequences when you leave the property to loved ones.
Failing to understand how you own the property and how that ownership will pass at death can lead to unintended results.
How Can You Leave Real Estate to Someone?
Common methods of leaving real estate to loved ones include:
- A gift through a will
- A gift through a trust
- A transfer-on-death or beneficiary deed, where permitted
- A tenancy in common
- A joint tenancy with right of survivorship
- A tenancy by the entirety
- A life estate and remainder interest
- A customized trust for multiple beneficiaries
The best method depends on the property, ownership structure, beneficiaries, debt, tax concerns, and your long-term goals.
1. Leaving Real Estate Through a Will
You can leave real estate to someone through your last will and testament.
The will can direct that your interest in a particular home, parcel, rental property, or other real estate pass to a named beneficiary.
Your attorney can identify the property clearly and create the appropriate testamentary language.
Advantages of Using a Will
Leaving real estate through a will is relatively straightforward.
You can:
- Name a specific beneficiary
- Name backup beneficiaries
- Direct that the property be sold
- Divide the proceeds among several people
- State whether the beneficiary receives the property subject to debt
- Explain how related expenses should be paid
A will can also be changed while you are alive and have legal capacity.
Disadvantages of Using a Will
Property passing through a will generally requires probate.
The personal representative must submit the will and complete the estate administration process before transferring the property.
Probate can involve:
- Court filings
- Creditor claims
- Appraisals
- Administrative expenses
- Public records
- Delays before the beneficiary receives clear ownership
Maryland Courts explains that when someone dies owning property that does not pass automatically through joint ownership, a trust, or another arrangement, the property is generally transferred through estate administration.
Obtain a Date-of-Death Appraisal
Real estate should generally be appraised as of the owner’s date of death.
The beneficiary may need the valuation to calculate capital gain or loss if the property is later sold.
The IRS explains that the basis of inherited property is generally its fair market value on the date of death, although exceptions and alternate valuation rules may apply. You can review this guidance in IRS Publication 559.
The beneficiary should retain the appraisal and related estate records.
2. Leaving Real Estate Through a Trust
A trust can direct who receives real estate after your death.
The trust may transfer the property outright or retain it for a beneficiary under specific terms.
A trust can also address:
- Who may occupy the property
- Who pays expenses
- Whether the property may be sold
- How rental income is distributed
- When a beneficiary receives ownership
- What happens if the beneficiary dies
- Whether several beneficiaries may use the property
The Property Must Be Transferred to the Trust
Creating and signing a trust does not automatically place real estate into it.
The deed must generally be prepared and recorded so that the trust or trustee holds title.
If you create a trust but leave the property titled solely in your individual name, probate may still be required to transfer it after your death.
Maryland Courts cautions that adding or removing a name from a deed requires preparing and recording a new deed. Small mistakes can have serious consequences, so deed preparation should be handled carefully.
Advantages of a Trust
Properly funded trust property may pass without probate.
This can:
- Reduce delays
- Provide greater privacy
- Allow continued property management
- Create rules for multiple beneficiaries
- Protect a beneficiary’s inheritance in some circumstances
- Provide for a beneficiary who cannot manage property independently
The trustee already has authority under the trust agreement to manage or transfer trust-owned property.
Disadvantages of a Trust
A trust requires more work during the owner’s lifetime.
The owner must create the trust, transfer the property correctly, maintain records, and coordinate insurance, mortgages, and other documents.
Trust administration can also involve expenses and ongoing responsibilities.
3. Transfer-on-Death or Beneficiary Deeds
Some states allow a real estate owner to record a transfer-on-death deed, sometimes called a beneficiary deed.
The deed names a beneficiary who will receive the property after the owner dies. The owner generally keeps control during life and can revoke or replace the designation.
Potential Advantages
A valid transfer-on-death deed may:
- Avoid probate for the property
- Allow the owner to retain lifetime control
- Provide a relatively simple transfer
- Cost less than some trust arrangements
Potential Disadvantages
The beneficiary generally receives the property outright.
This may expose the property to:
- The beneficiary’s creditors
- Divorce claims
- Poor financial decisions
- Bankruptcy
- Conflicts among multiple beneficiaries
A transfer-on-death deed may also be a poor fit when the owner wants to control use, occupancy, sale, or management after death.
Transfer-on-Death Deeds in Maryland
Not every state authorizes transfer-on-death deeds for real estate.
Maryland does not generally provide for a conventional transfer-on-death deed for real property. Maryland property owners typically use another method, such as a will, trust, survivorship deed, or life-estate arrangement.
Property owners should not download a beneficiary deed intended for another state and assume it will work in Maryland.
4. Leaving Real Estate to Multiple People
You may want more than one person to receive the same property.
For example, you may own a family cabin that you and your adult children have enjoyed for years. You may want all the children to continue using it after your death.
This sounds simple, but shared ownership can create significant problems.
The plan should address:
- Each person’s ownership percentage
- Scheduling and use
- Taxes and insurance
- Maintenance and repairs
- Improvements
- Rental income
- Guests
- Whether an owner may sell a share
- What happens after an owner dies
- How disputes will be resolved
- Whether the property can be sold
The form of ownership will affect many of these issues.
5. Tenancy in Common
Tenancy in common is a common form of ownership between people who are not married.
Each owner holds a separate percentage interest in the property. The percentages do not necessarily have to be equal.
Each owner generally has the right to use the entire property, subject to the rights of the other owners.
What Happens When a Tenant in Common Dies?
A tenant in common’s share does not automatically pass to the other owners.
Instead, that share passes according to the deceased owner’s will, trust, or state intestacy law.
In the family cabin example, each child could use the cabin and share responsibility for taxes, insurance, and maintenance. However, each child could leave their share to someone else.
Over time, ownership might pass to spouses, children, or other beneficiaries. This could create an increasingly large and complicated group of co-owners.
Risks of Tenancy in Common
A co-owner may also be able to:
- Sell their share
- Transfer it to another person
- Use the share as collateral
- Leave it to their own beneficiaries
- Ask a court to partition or sell the property
A written co-ownership agreement can establish expectations, but it may not eliminate every risk.
6. Joint Tenancy With Right of Survivorship
Joint tenancy also gives multiple people ownership and use of the same property.
The primary difference is the right of survivorship.
When one joint tenant dies, that person’s interest generally passes automatically to the surviving joint tenant or tenants rather than through the deceased owner’s will.
Maryland’s Orphans’ Court confirms that property held in joint tenancy with right of survivorship passes outside probate.
How Survivorship Affects a Family Property
Suppose three siblings inherit a cabin as joint tenants with right of survivorship.
When the first sibling dies, that person’s share passes to the two surviving siblings. It does not necessarily pass to the deceased sibling’s children.
When the second sibling dies, the last surviving sibling becomes the sole owner. That sibling can then sell the cabin or leave it to anyone.
This may or may not reflect the original owner’s intention. Survivorship can ultimately favor the youngest or longest-living owner.
A Joint Tenancy May Be Severed
A joint tenant may be able to sever the joint tenancy by transferring that person’s interest.
After severance, the ownership arrangement may become a tenancy in common. This can create confusion if the owners believed the survivorship arrangement could not be changed.
The rules depend on applicable state law and the language of the deed.
7. Tenancy by the Entirety
Tenancy by the entirety is a form of joint ownership available to married couples in Maryland and certain other states.
It includes a right of survivorship. When one spouse dies, the surviving spouse generally becomes the sole owner automatically.
Maryland’s People’s Law Library provides an overview of tenancy by the entirety and other forms of joint property ownership.
Potential Advantages
Tenancy by the entirety may provide:
- Automatic transfer to the surviving spouse
- Avoidance of probate at the first spouse’s death
- Protection from certain creditors of only one spouse
- Protection against unilateral transfer by one spouse
Unlike a standard joint tenancy, one spouse generally cannot sever a tenancy by the entirety without the other spouse’s participation or a legal event such as divorce.
Limitations
Creditor protection is not absolute.
Protection may not apply to:
- Joint debts
- Certain federal tax liens
- Obligations secured by the property
- Claims that fall within a legal exception
Tenancy by the entirety also only determines what happens at the first spouse’s death. The surviving spouse still needs an estate plan for the property.
8. Life Estates and Remainder Interests
A life estate gives someone the right to use and occupy property during that person’s lifetime.
The person holding the life estate is called the life tenant. The person who receives full ownership after the life tenant dies is called the remainderman.
A life estate may be created through a deed or trust.
Maryland Courts explains that when a homeowner with a deed-based life estate dies, the person named in the deed generally becomes the property owner.
How a Life Estate Works
Suppose a parent gives a spouse the right to live in the home for life. The parent’s children hold the remainder interest.
The spouse may live in the home for the rest of the spouse’s life. When the spouse dies, ownership passes to the children.
The life tenant generally does not have the same unrestricted ownership rights as someone who owns the property outright.
Depending on the deed or trust, the life tenant may not be able to:
- Sell the entire property
- Mortgage the entire property
- Change the remainder beneficiaries
- Make major changes without consent
Possible Uses for a Life Estate
Life estates may be considered in planning involving:
- Blended families
- Family farms
- Long-term occupancy
- Successive generations
- Certain Medicaid strategies
For example, one spouse may have the right to live in the home for life, while the property ultimately passes to the first spouse’s children.
A farm owner might allow one child to use the land for life while directing that the property later pass to other descendants.
Important Risks of a Life Estate
A life estate should not be created without legal and tax advice.
Depending on how it is structured, it may:
- Limit the owner’s ability to sell or refinance
- Require cooperation from remainder beneficiaries
- Create capital gains or gift-tax consequences
- Expose the remainder interest to a beneficiary’s creditors
- Affect Medicaid eligibility
- Create a Medicaid transfer penalty
- Affect estate recovery
- Cause disputes over taxes, insurance, repairs, and maintenance
A life estate is not automatically a safe Medicaid planning strategy.
Medicaid rules depend on the timing, value, retained rights, state law, and the applicant’s circumstances. Anyone considering a life estate for long-term care planning should consult an attorney before signing a deed.
Should Real Estate Pass Outright or Remain in Trust?
Outright ownership gives the beneficiary control of the property.
The beneficiary can generally sell, mortgage, rent, or transfer it. The property may also become subject to that person’s creditors, divorce, bankruptcy, or poor financial decisions.
A continuing trust can place limits on ownership and management.
A trust may be helpful when:
- Several family members will use the property
- A beneficiary is a minor
- A beneficiary has a disability
- The property is a farm or family business
- The owner wants to prevent an immediate sale
- The beneficiaries need creditor protection
- The property generates rental income
- The family wants professional management
The trust should clearly explain how expenses, use, and sale decisions will be handled.
Questions to Answer Before Leaving Real Estate
Before choosing a transfer method, ask:
- How is the property currently titled?
- Is there a mortgage or other lien?
- Who should receive the property?
- Should the beneficiary receive it outright or in trust?
- Can the beneficiary afford the taxes and maintenance?
- Will more than one person use the property?
- Should the property be sold instead?
- What happens if the beneficiary dies before you?
- Can a beneficiary force a sale?
- Should one beneficiary have a purchase option?
- Are there tax or Medicaid concerns?
- Does the property include more than one parcel?
- Is the property located in another state?
The answers will help determine the most appropriate planning method.
Review the Deed Before Creating the Plan
Your will cannot control property that passes automatically under the deed.
For example, property held in joint tenancy with right of survivorship or tenancy by the entirety generally passes to the surviving owner regardless of what the will says.
Obtain a copy of the current deed and confirm:
- The legal owner or owners
- The form of ownership
- The legal description
- Whether survivorship rights exist
- Whether the property includes multiple parcels
- Whether a life estate already exists
Maryland Courts explains how to locate a property deed through the state’s land records.
Coordinate the Mortgage and Insurance
A transfer at death does not automatically eliminate a mortgage, tax lien, association obligation, or insurance requirement.
The estate plan should address whether:
- The estate will pay the mortgage
- The beneficiary will receive the property subject to debt
- The property should be sold
- Insurance will remain in place during administration
- A trust will pay taxes and maintenance
- The beneficiary can afford to keep the property
The personal representative or trustee should contact the mortgage servicer and insurance company promptly after death.
We Can Help You Leave Real Estate to Loved Ones
Leaving real estate does not require a one-size-fits-all approach.
You can create a plan that reflects the type of property, how it is owned, your beneficiaries, and your long-term goals.
McDonald Law Firm can help you compare wills, trusts, joint ownership, life estates, and other real estate planning options.
Attorney André O. McDonald assists clients in Howard County, Montgomery County, and the District of Columbia with estate planning, special needs planning, Medicaid planning, and related matters.
To schedule a consultation, call:
- Howard County: 443-741-1088
- Montgomery County: 301-941-7809
- District of Columbia: 202-640-2133
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
