Owning a home comes with a lot of challenges. One of them is incorporating it into your estate plan. It used to be a fairly straightforward process. If you created a revocable living trust, you’d transfer your house to that trust and you were done.
Today, there’s a lot more to think about when doing estate planning with your house. These are the main approaches and issues to consider:
- Titling your house in the living trust. Transferring your house to your revocable living trust will avoid the cost and hassle of probate. Also, it’ll prevent the property taxes from uncapping at your passing if you leave the house to your children and it’s only modestly rented. However, having the trust own your house may give up important creditor protection. In other words, if you’re sued and found liable, your house may be at risk for being levied against. Another risk is if you or your spouse needs nursing home care and has to apply for Medicaid, your house will be a countable asset and likely prevent you or your spouse from becoming eligible for Medicaid.
- Creating a ladybird deed. Ladybird deeds can be a better option to protect your house from a Medicaid standpoint. It’ll allow the house to be an exempt asset while also avoiding Michigan’s right of estate recovery. It’s also a very important way to protect the house from lawsuits and creditors. If you and your spouse are the owners as tenancy by the entireties under the ladybird deed, this will better protect it from those creditors. However, there are some downsides to ladybird deeds. If you want to keep your house in the family, it isn’t clear if the assessor can uncap the property taxes upon your passing. Also, if your house is a very valuable asset, having it go to your spouse as opposed owning in your AB trust may not provide the best protection from estate taxes. Lastly, if you have a blended family, passing the house to your spouse (rather than it being held in trust for the surviving spouse) may allow it to be used or sold in a way that runs contrary to the intentions in your trust and estate plan.
- Transferring your house to an LLC. If you rent out your house for part of the year, you may want to consider setting up an LLC to own it. If there’s an accident on the property and you weren’t personally involved, you’d be better protected from a liability standpoint. However, there are significant costs to this approach. The first is that you’ll have to give up your homestead exemption and pay higher property taxes. Also, you won’t be able to pass the house down to your family without the property taxes being uncapped.
As you can see, there are a number of options and issues to consider with the ownership of your house. If you have any questions about how to title your house as part of your estate plan, feel free to contact me at phmulder@cunninghamdalman.com.
