Avoiding Probate on the House

Frequently, clients think that a revocable living trust will avoid probate in Florida. As I discuss here:

Why revocable living trusts usually won’t avoid probate in Florida
A revocable living trust can actually trigger a probate in Florida; particularly if Florida real estate, such as a house, is part of the trust.

There are things that can be done to avoid probate in the case of most financial type accounts; stocks, bonds, CD’s savings and checking accounts; and I explain what can be done here

Living Trust Alternatives

But I want to address the question of real estate, particularly the family home. The home may be a single family residence, it might be a condo. But for many people this is their single most valuable asset; and frequently they want to leave it to their children and avoid probate on the home.

Depending on the situation, there may be several different ways to avoid probate; all of these methods involve drafting a deed and naming someone else as a co-owner; the key is, though, what type of deed and what type of co-ownership can make a big difference.

First, if the person is married, they can name their spouse, their husband or wife, as a co-owner of the house. In fact, in many cases, spouses typically co-own the family home in Florida; the most common deed to a married couple in this state involves what is called tenancy by the entirety, which has to identify the couple as being married. Typical language may be “Bob Smith and Mary Smith, a married couple”, or “Bob Smith and his Wife, Mary Smith” or “Bob Smith and his Spouse, Mary Smith”, but it has to be apparent from the language of the deed that the two people are married, to each other. And, they do have to be, in fact, married to each other; if they are not married to each other but the deed recites that they are, the deed does not create a tenancy by the entirety.

What’s the significance of a tenancy by the entirety? Without going into a technical explanation, it does two things: first, it creates what is essentially a ‘right of survivorship’ between the parties; whichever of the spouses dies first, the surviving spouse gets all of the property upon the death of the deceased spouse. In this aspect it is very similar to a “Joint Tenancy with Right of Survivorship” which can be used between two or more people who are not married to each other. However, there is an additional benefit; in Florida, property held as Tenants by the Entirety is exempt from, that means, not available to, creditors of one spouse; in order for someone to force the sale of property held as tenants by the entirety, the creditor has to have a judgment against both spouses , both the Husband and the Wife. If only one spouse owes money to the creditor, the creditor cannot force the sale of the property. Note that this is in addition to any other exemptions on the property; such as any Homestead exemptions. Also, be aware that the tenancy by the entirety will be broken, or ended when either 1) one spouse dies or 2) the parties are divorced. If the parties are divorced then the ownership is converted to a Tenancy in Common, typically with each ex-spouse owning half of the property. If the marriage is terminated by death of one of the parties, the creditors exemption also ends; but it will depend on which spouse died; if the spouse who owed the money dies, the surviving spouse who did not owe the money takes the property outright, free of any claims by the creditor. On the other hand, if the spouse who did not owe the money dies, then the surviving spouse loses the protection of the tenancy by entirety and the house may be available to the creditors to satisfy any judgments; this is assuming that there are no other exemptions, such as homestead, available to the surviving spouse.

What about parties who are not married to each other? This is where things can get tricky. Frequently I’ll have clients suggest that they want to put a child on the deed as a co-owner; usually as a Joint Tenant with Right of Survivorship. This may not be a good idea; for several reasons. First, whether they know or not, there may be tax implications; by naming someone who is not a spouse as co-owner, they are making a gift to them and under most circumstances, a Federal Gift Tax Return is due. Frankly, a lot of times this doesn’t get filed, but technically, it is supposed to be filed. Depending on the value of the property and depending on how many types of these transfers are made, it is possible that money may be owed to the government for a Gift Tax.

Second, by naming a child as a Joint owner with right of survivorship, that child now owns a piece of the property, right now. The problem with that is what happens if someone gets in financial trouble? This can happen in two different ways. Most commonly, the child gets in some sort of financial trouble; they get in a car wreck, they run up some medical bills, they run up some credit card bills. Or child support. Or, for that matter, they get divorced and the lawyer for the child’s former spouse goes sniffing around to see if there’s any assets they can go after. And, lo and behold, it looks like they own some property in Florida. Under some circumstances, they may be able to force a sale of the house and all of the sudden, the parent or parents are looking at losing their house. This is not a happy place to be.

Or, sometimes it’s the flip side of the coin; someone comes onto the property in Florida, gets hurt, and sues. Assuming that the house is the homestead of the parent, the person can’t take the parents portion of the house under most circumstances; but if the child who is the co-owner doesn’t live there, they are still liable for any accidents that happen on the property; all of the sudden they wind up being sued for an accident that happened in the parents property in Florida and their own assets are at risk. Additionally, if the child who is a co-owner doesn’t live in the house in Florida, the person who wins the lawsuit can still force a sale of the house, even though it is the parents homestead; the parent will get their share of the value of the house out of the sale, but they will lose the portion of the value that goes to their child or children. One again, not a happy time

And there’s another wrinkle in this; say, at some point, after the parent puts the child on the deed, the parent decides they want or need to sell the property; or they want to get a reverse mortgage to pay bills. Whether they know it or not, the child is a present co-owner of the property; the child can refuse the sale, refuse to cooperate with the mortgage, or insist on getting some of the money from the sale. And, the way most reverse mortgages work you can’t get one unless all of co-owners actually live there. And sometimes, parents and children fall out; if the child decides they don’t want to cooperate, you are looking at a fairly expensive, complicated lawsuit.

Lastly, putting a child on deed as a co-owner may have implications if the parent has to go to a nursing home; without getting into detail, one of the things that the state looks at when someone comes in to apply for nursing home assistance is whether the person has transferred anything of value to their children; if they have, then they can deny assistance for a period of time.

Simply transferring the property to the child or children outright, usually by a quitclaim deed, is even worse; you run the risks of all I have discussed above, i.e., the gift tax implications, seeing the property go to someone the child owes money to, seeing the property get lost if the child gets a divorce, and making the parent ineligible for nursing home assistance from the state; on top of the parent not owning the house at all, and losing any homestead protection.

The point is, transferring a house outright to a child or other person who is not a spouse is usually a bad idea; a very bad idea. Having said that, there may be some very specific circumstances where it makes sense, but you need to talk to a lawyer about the specifics.

So, coming back to where we started out, what can you do to avoid probate on the house?

There is a specific type of Florida deed, called a “Ladybird Deed”, sometimes called an “Enhanced Life Estate Deed” which allows the parent, or parents, to own the house during their lifetime; to retain full rights to sell, mortgage, transfer, give away, or otherwise deal with the property during their lifetime, to keep all money from the sale or mortgage, and to revoke the deed if need be, during their lifetime; but, if they don’t transfer the house or revoke the deed, the house will go to who they want after the parent dies, all the children need to do is record the death certificate on the parent and the property passes to them outside of probate.

The Ladybird Deed is a fairly technical type of deed, and needs to be properly drafted; but properly used it can accomplish what the parent wants; they retain full ownership and freedom to deal with the house during their lifetime; but passes the house to the children upon their death while avoiding probate.

My fees start at $200 for preparing a Ladybird Deed. If you have a question about transferring a house outside of probate or avoiding probate on a house  in Wildwood, or The Villages, Florida, please contact my office.