As a real estate and estate planning attorney and a real estate broker, I am consistently approached by people asking me what they should do to protect their real estate and other titled assets from future probate and the long arms of a hypothetical future judgment creditor. This usually leads to great conversation, planning, and changes.
Most people think there is no hurry to move their non-owner-occupied property into an entity (like an LLC or Trust) to protect their personal liability or to execute a transfer-on-death type of deed to avoid probate. They do not think they will be hit by a bus anytime soon or that someone will secure a judgment against them that can attach to their home and other assets. But the truth is, these things happen all the time. Without proper planning, sometimes it’s just too late to protect yourself.
Another common oversight people have is not thinking ahead about the consequences of how they take title to their property. They may be buying a property with a friend or a significant other and don’t realize the consequences of taking title as joint tenants until they break up, and one wants to sell, and one wants to stay.
Or they don’t understand what community property means. Their marriage breaks up, and they do not know that all income is community property or understand the exceptions to community property: inherited assets, gifts, assets a person walked into the marriage with, and assets a person bought with money that they inherited or had before they married. These assets are not community property and do not get split upon divorce (as long as they have not been comingled).
One of my favorite things to do is sit down with someone or with a couple and run through their list of assets together and discuss each one. I ask, what is your intention with this asset if you die? Do you have kids from a prior relationship or marriage (most of us do), and how do you want to distribute your assets between those kids and your current spouse so everyone is comfortable? We execute a Disclaimer Deed if the intention is for one spouse to own property solely and separately. With their primary residence, we discuss creating and moving it into a Trust to avoid probate. If they don’t want a Trust, we discuss a Beneficiary Deed to pass to their beneficiary upon the death of the second one, without probate. Suppose it’s an income or non-owner-occupied property (think rental or AirBnB). In that case, we look at the option of creating and moving the title into an entity, like an LLC, to keep possible judgments away from their personal assets. There are many ways to avoid probate and protect oneself from creditors.
None of this happens magically. When I am teaching my classes on estate planning, I ask my students, how come most of you (more than 75%) have nothing written down? A Trust, a Will, Medical Directives, a Financial/Durable or Medical Power of Attorney, why do you have your rentals in your personal names? The number one answer is: “There is no hurry, I’m not dying anytime soon”. They also say, “I figured I’d get around to it.” Or, “It’s too expensive” (PS – it’s not). Or, “I don’t think I have enough assets to worry about estate planning”. Most admit that they don’t like to think about their mortality. The thing is, once you are incapacitated (dementia, coma, etc.), it’s too late.
A person must be “of sound mind” to execute a Will, Trust, Power of Attorney, etc. You cannot do it while you are on a morphine drip, controlled substances, or narcotic drugs for pain without opening yourself up to your mental capacity being attacked and your document possibly being thrown out. Certain medications cause cognitive impairment and will allow an attorney to attack a Will or power of attorney. Medication can be a threat to your testamentary capacity. Why go there? The window of opportunity is now.
Analyzing one’s list of assets, it’s not difficult to go one by one and decide how to hold title to avoid probate and to protect oneself from creditors. There are TOD/POD documents (transfer on death, payable on death) for most titled assets, there are Living Trusts, and there are Beneficiary Deeds. There is the option to own real estate with someone as Joint Tenants with the Right of Survivorship or with a spouse as Community Property with the Right of Survivorship. There is the option to move each investment property into an entity and assign your membership to your Trust or have your Trust be a member. There is a structure available for everything that will allow your heirs and beneficiaries less of a headache if you become incapacitated or if you die. Don’t wait until someone can challenge your mental capacity and condition. The time to plan is now.
BJ Gibbons is a Tucson real estate attorney, broker, and instructor. She holds four state licenses and teaches continuing education classes to brokers and realtors through the Hogan School of Real Estate, and the Arizona School of Real Estate and Business, teaching courses on ‘Real Estate in Estate Planning: Is Your House in Order?’ And on ’10 Ways to Take Title to Real Estate in Arizona’, and another on ‘The Truth About Estate Planning in Real Estate’, among others. She can be reached at bj@azrealtyandlaw.com