You may have read a widely circulated post on Facebook that would make you think you should prepare a Transfer on Death Deed (TODD) to pass your property when you die without the need for probate. And you can download and prepare such a document at various online locations. See https://www.templateroller.com/template/2142576/transfer-on-death-deed-form-alabama.html. The only problem is Alabama does not have a TODD statute, so any such deed would have no validity.
As of January 14, 2022, twenty-nine states, along with the District of Columbia and the U.S. Virgin Islands, have some form of TODD. Alabama is not one of them, and neither is Georgia or Florida. Mississippi, bordering Alabama, does have a TODD statute, and, as of January 14, 2022, a TODD statute was pending in Tennessee.
There are other ways to pass property while avoiding probate, but be aware of the fact that the TODD is not available in Alabama.
A life estate deed can be a great tool for passing property after death. A couple might give the property to their children and reserve a life estate for themselves until the last of the two dies. The couple retains their homestead exemption status for life, and at death the property will automatically belong to the children without the need to probate anyone’s will. Also the child will have a stepped up tax basis in the property which is the fair market value on the date of death of the last life tenant. An additional benefit is the fact that Medicaid will not count the life estate as a resource if the life estate deed was executed five years prior to Medicaid application, and the property would not be subject to Medicaid Estate Recovery since it will never be probate property. That all sounds like a win, win situation, right?
It is, except for one thing. If the couple decides to sell the property they will need the children to sign off on the sale because the children are now joint owners with the parents. The parents own use of the property NOW, and the children, as remaindermen, own the FUTURE use of the property.
Often a life estate deed is given with the goal of keeping property in the family, but that is not always the case. Sometimes the life tenants want to sell the property to obtain funds for any number of purposes. With this in mind, before signing a life estate deed it is important to make sure the remaindermen would be willing to relinquish their interest and sign off on any sale of the property.
Title to real property defines legal ownership of the property, and that ownership is usually identified by language in the deed showing who owns the property and how it is owned. Rights associated with property is also a matter of state law and can be altered by marital status.
There may be multiple times when you will need to decide how to title property – such as when you purchase property or when you give property to others during your lifetime or through your estate when you die. It is important to understand the different ways property can be owned before you make decisions on how to title it or whether a will may need to be probated.
The most common ways to hold title are:
Sole Ownership
Joint Tenancy with or without Right of Survivorship
Tenants by the Entirety
Tenants in Common
Life Estate Tenant
Heirship
Community Property
Sole Ownership
Sole ownership is ownership by one individual or entity. The most common sole ownership is one held by a single person or a married person who wants to hold property apart from his or her spouse. Sole ownership might also be ownership by a business or trust.
It is important to realize that even if you are a sole owner, if you are married and the property is your homestead in Alabama, you will not be able to transfer the property without your spouse’s signature on the deed. It is also important to have your will in place to transfer the property at death since there is no right of survivorship with sole ownership. If you own property alone and die without a will your next of kin will inherit the property through the laws of intestacy (laws defining how property passes without a will).
Joint Tenancy with or without Right of Survivorship
Joint tenancy means that two or more people hold title to real estate jointly, and each has the right to occupy the full property during his or her lifetime.
If one of the owners die, his or her rights of ownership pass to the heirs unless the deed specifically states that the owners are joint tenants with right of survivorship, means that the property will automatically pass to the surviving owner. This is how many married couples own property in Alabama.
The primary advantage to joint tenancy with right of survivorship is that the death of the first of the joint owners does not require probate of his or her will. The property passes outside probate (outside the will) to the survivor. Expenses of upkeep, taxes, insurance, etc., are shared between the joint tenants.
You do not often see it, but property owned by joint tenants with right of survivorship can be severed (an owner’s share sold) resulting in the property thereafter being held as tenants in common.
A creditor who obtains a legal judgment against one of the owners can come after the property, requiring it to be divided, to have the debt satisfied.
Tenants by the Entirety
This method of ownership can only be used when owners are legally married. This type of ownership is generally not seen in Alabama, but it is mentioned in the code indicating at Code of Alabama § 43-7-4. There it states that:
Where there is no sufficient evidence that two joint tenants or tenants by the entirety have died otherwise than simultaneously, the property so held shall be distributed one half as if one had survived and one half as if the other had survived. If there are more than two joint tenants and all of them have so died, the property thus distributed shall be in the proportion that one bears to the whole number of joint tenants.
Property owned as tenants by the entirety cannot be severed, or one spouse cannot sell his or her share.
You will not own Alabama property in this manner, but you may see it in other jurisdictions such as Arkansas, Delaware, Florida, Hawaii, Maryland, Massachusetts, Mississippi, Missouri, New Jersey, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Wyoming.
Tenants In Common
With tenancy in common two or more persons hold title to real estate jointly. They may own it equally or in unequal percentages. For example one may own 30 percent of the property while the other owns 70 percent, but despite those ultimate ownership shares, each owner has the right to occupy and use all of the property while the ownership percentages define the financial ownership of the real estate. If the property is sold, each will get his or her ownership percentage. Either owner may sell or give away his or her share of the property, and at death his or her share will pass to those named in a will or next of kin through inheritance. Each owner is responsible for all debts against the property (for instance both or all parties are responsible for all taxes due on the property).
Life Estate Tenant
You may have the right to occupy property during your lifetime through a life estate, and when you die people called the remaindermen instantly become the owners. Often in second marriages a spouse will leave a life estate to the widow and the remainder interest to his or her children. Another situation where life estate interests are seen is when a parent gives the property to children and retains a life estate in the deed.
Heirship
While title is usually determined by the deed, that is not always true. In the case of heir property you may be living on property that was last deeded to your grandparents whose estates were never legally settled, and there is no deed in your name. In that event determining how your grandparent’s property passed by operation of law is necessary. Often this requires tracing family relationships and deaths over the course of several generations to land on who actually owns the property today.
Community Property
There are nine community property states in the U.S.: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska is an opt-in community property state that gives both parties the option to make their property community property. Alabama is not a community property state.
Community property is a form of ownership by a married couple during marriage that they intend to own together. Each spouse owns the property equally, and owes any debt against the property equally regardless to who earned the money to purchase the property or incurred debt for which the creditor seeks to satisfy from the property value. In the event of divorce each spouse will gets an equal division of the property. In the event of death there is no survivorship unless the couple lives in a state that permits survivorship (Arizona, California, Nevada, Texas, Wisconsin). Outside those community property survivorship states the couple must have a Community Property Survivorship Agreement. Without living in a community property survivorship state or having a Community Property Agreement each partner’s share will pass through his or her estate.
The take away:
How you own property is just as important as the fact that you own it. What you can do with property – your rights and obligations – and how you can leave property to your heirs can only be determined by knowing how the title is currently held. If you are planning on any property acquisitions, transfers or estate distributions, it is critical that you understand how you already own or want to own or have your heirs own property.
The term “life estate” often comes up in discussions of estate and Medicaid planning, but what exactly does it mean? A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, at which time it passes to the other owner, referred to as the person with the remainder interest. Life estates can be used to avoid probate while giving a house to children without losing the ability to live in the home, remaining responsible for property tax – with the benefit of homestead and age related tax exemptions, remaining responsible for homeowner insurance, yet creating ownership in the children at the death of the parent. This type of deed can play an important role in Medicaid planning since Medicaid does not assign any value to a life estate when the parent applies for Medicaid to pay for nursing home care. If the transfer occurred prior to five years before application, there will be no penalty for the transfer.
In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her life. The other owner — the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.
Another example of use of life estates is when a spouse who owns property in only his or her name wants to leave that property to his or her children from a former marriage but wants the later in life spouse to be protected and have a place to live. That person might write a will leaving a life estate to the spouse with the remainder to his or her children on the death of the spouse. This comes up not infrequently when individuals want to protect property passed to them by family and who want to keep that property in their blood line while protecting the spouse as well.
When the life tenant dies, the house will not go through probate, since at the life tenant’s death the ownership will pass automatically to the holders of the remainder interest. Because the property is not included in the life tenant’s probate estate, it can avoid Medicaid estate recovery in states that have not expanded the definition of estate recovery to include non-probate assets, which includes Alabama at the time this is being written.
Although the property will not be included in the probate estate, it will be included in the taxable estate. Depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation. However, the joint federal lifetime estate tax exemption and gift tax exclusion is $5,490,000, so few people are actually subject to estate tax.
The life tenant cannot sell or mortgage the property without the agreement of the remaindermen. If the property is sold, the proceeds are divided up between the life tenant and the remaindermen. The shares are determined based on the life tenant’s age at the time — the older the life tenant, the smaller his or her share and the larger the share of the remaindermen.
Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if Medicaid application is made within five years of the transfer. Further, purchasing a life estate should not result in a transfer penalty if you buy a life estate in someone else’s home, pay an appropriate amount for the property and live in the house for more than a year.
For example, an elderly man who can no longer live in his home might sell the home and use the proceeds to buy a home for himself and his son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children’s existing home. Assuming the father lives in the home for more than a year and he paid a fair amount for the life estate, the purchase of the life estate should not be a disqualifying transfer for Medicaid. Just be aware that there may be some local variations on how this is applied, so get good advice before finalizing arrangements involving a life estate if long term care could be a future concern.
The term “life estate” often comes up in discussions of estate and Medicaid planning, but what exactly does it mean? A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, at which time it passes to the other owner, referred to as the person with the remainder interest. Life estates can be used to avoid probate while giving a house to children without losing the ability to live in the home, remaining responsible for property tax – with the benefit of homestead and age related tax exemptions, remaining responsible for homeowner insurance, yet creating ownership in the children at the death of the parent. This type of deed can play an important role in Medicaid planning since Medicaid does not assign any value to a life estate when the parent applies for Medicaid to pay for nursing home care. If the transfer occurred prior to five years before application, there will be no penalty for the transfer.
Jan Neal Law Firm, LLC 