Understanding the estate planning process is critical, particularly when real estate is involved, because it allows clients to make informed decisions and avoid common pitfalls. Real estate transactions can be incredibly complex, and without proper planning, families may face unnecessary legal challenges and financial burdens. When clients understand their options, such as the differences between wills and trusts, they can better protect their loved ones and ensure their assets are transferred efficiently.
In this article, we will break down some of the most common misconceptions about including your home (and other forms of real estate) in your estate plan. Keep reading to learn more about:
- How to avoid leaving your children with high capital gains tax when you leave them your home.
- How Ladybird Deeds can help you transfer ownership of your home during your lifetime and improve your Medicaid eligibility.
- How our Texas estate planning law firm approaches working with clients like you.
Myth #1: My Heirs Will Avoid Probate If I Add Their Names To The Deed For My House
It is a common misconception that adding your heirs’ names to your property deed will help them avoid probate. In reality, this approach can lead to unintended complications.
Here is why:
Creditor Exposure
When you add someone as a co-owner on your deed, their financial issues can become tied to the property. If one of your heirs faces financial troubles, their creditors may place a lien on the property, putting it at risk.
Medicaid Eligibility
Transferring ownership of property during your lifetime can impact your eligibility for Medicaid benefits. Such transfers are subject to Medicaid’s look-back period, which could result in penalties or delays in qualifying for needed care.
Predeceased Heirs
If the heir added to your deed passes away before you, their share of the property might not revert back to you automatically. This can create challenges and confusion in determining how the property will be distributed.
Instead of adding heirs to your deed, consider exploring alternative estate planning tools, such as a trust. A trust can provide a smoother and more secure way to transfer assets while avoiding the risks associated with co-ownership. This approach helps protect your property and ensures your wishes are carried out efficiently.
Myth #2: My Home Automatically Goes To My Spouse If I Pass Away In Texas
In Texas, what happens to your real estate depends on how the property is titled and whether it is considered community or separate property. If the property is community property and there are no children from outside the marriage, the surviving spouse generally receives the deceased spouse’s share.
However, if there are children from a prior relationship (a blended family), the situation changes. In such cases, the spouse retains their half, but the deceased spouse’s half goes to their children. Understandably, this can lead to complications if the children and surviving spouse do not have a good relationship.
Myth #3: It Is Better To Gift My House To My Children Before I Die Rather Than Leave It To Them In A Will
This is not true. Gifting real estate to your children before passing away can have significant tax implications, particularly concerning capital gains taxes. When you gift property during your lifetime, it retains your original cost basis, meaning the value at which you purchased the property. For example, if you bought the property for $100,000 and your children sell it later for $500,000, they would owe capital gains tax on the $400,000 increase.
Aurelio Garza of The Law Office of Aurelio Garza PLLC in Texas is a trusted authority on estate planning, particularly when it comes to real estate and deed-related strategies. With years of experience guiding clients through the complexities of probate and property transfer, Mr. Garza helps families avoid common missteps, such as adding heirs to deeds prematurely. His clients have successfully navigated these scenarios, safeguarding assets while minimizing complications.
If you want to explore the best options for your real estate planning needs, contact Aurelio Garza today to get started.
However, if you leave the property to your children through a will or trust, they benefit from a step-up basis. This means the property’s value is adjusted to its market value at the time of your death, potentially reducing or even eliminating capital gains taxes when they sell the property. As a result, passing the property through a will or trust is often more advantageous from a tax perspective than gifting it during your lifetime.
Myth #4: A Transfer On Death Deed Protects My House From Creditors
A Transfer on Death (TOD) Deed will not protect your property from creditors. While one might allow your property to transfer to a beneficiary upon your death, any outstanding debts, such as a mortgage, remain associated with the property. Since the property is still legally yours during your lifetime, it is subject to creditor claims.
If you owe debts at the time of your death, creditors can pursue repayment from the property, even with a TOD deed in place. Therefore, while this type of deed can facilitate the transfer of property, it does not shield it from creditors.
There is also what we call a Lady Bird Deed, also known as an enhanced life estate deed. These allow you to transfer property to a beneficiary while retaining full control during your lifetime. Unlike a Transfer on Death Deed, which only transfers ownership after death, a Lady Bird Deed allows you to live on or sell the property during your lifetime without needing permission from the beneficiary.
One unique advantage of the Lady Bird Deed is its potential to help with Medicaid eligibility. Because the property only transfers upon death, it typically avoids Medicaid estate recovery, allowing you to preserve the property for your beneficiaries. This type of deed can be especially beneficial when planning for long-term care while maintaining control over the property during your life.
Myth #5: I Do Not Need A Trust To Protect My Home If I Already Have A Will
The reality is that having a trust in addition to a will can offer you several advantages, especially when it comes to real estate. A trust provides more control over how your property is managed and distributed. Unlike a will, which must go through the public probate process, a trust allows for privacy and can help you avoid probate altogether, making the transfer of assets quicker and more efficient.
A common setup includes a pour-over will, which transfers any assets not already in the trust into it upon your death. This ensures that any property accidentally left out of the trust still benefits from the trust’s protections. So, while a will is important, a trust can offer more flexibility, privacy, and efficiency in managing and distributing your real estate.
How We Support Clients Like You
At The Law Office of Aurelio Garza PLLC, we take a personalized approach to estate planning, simplifying complex processes to make them accessible and understandable. We prioritize education, breaking down legal jargon and explaining how tools like trusts can streamline planning and often help avoid probate.
Having personally faced the challenges of navigating estate planning, I deeply empathize with clients who feel overwhelmed or uncertain. Our goal is to empower you to make informed decisions confidently, ensuring peace of mind for you and your loved ones.
Still Have Questions? Ready To Get Started?
For more information on Estate Planning In Texas, an initial Peace of Mind Planning Session is your next best step. Get the information and legal answers you are seeking by calling (956) 513-1117 today.
Aurelio Garza of The Law Office of Aurelio Garza PLLC in Texas is a trusted authority on estate planning, particularly when it comes to real estate and deed-related strategies. With years of experience guiding clients through the complexities of probate and property transfer, Mr. Garza helps families avoid common missteps, such as adding heirs to deeds prematurely. His clients have successfully navigated these scenarios, safeguarding assets while minimizing complications.
If you want to explore the best options for your real estate planning needs, contact Aurelio Garza today to get started.
