How to Own Your Real Estate - Part One
The third week of October is National Estate Planning Awareness Week. In reflection of this fact, let’s talk about real estate and how it is but one piece of the estate for which you should be planning. Real estate encompasses not only one’s primary residence but also other property, such as a vacation home or a rental property. The ideal form of ownership varies depending on the type of real estate you own. Today, we take a look at ownership options for a primary residence, with views on how to own vacation homes and rental real estate coming tomorrow.
Primary Residence
Because your primary residence receives special tax treatment, you should carefully consider how your home is owned. In some states, as in Tennessee, tenancy by the entirety offers married couples creditor protection from the creditors of one of the spouses (with a possible exception for federal tax liens) while still preserving relevant tax benefits. It also allows automatic transfer of ownership to the surviving spouse upon the death of the first spouse without court involvement. Transferring ownership of the primary residence to a joint revocable trust may also be an option if you live in a state, such as Tennessee, that allows the tenancy of the entirety protection to transfer to the joint revocable trust. Ownership by the trust also means that the real estate will not go through the lengthy, expensive, and public probate process but will instead be handled according to your wishes as specified in the trust document.
If you are single, owning the property in your name allows you to take advantage of tax benefits for primary residences. Transferring ownership to a revocable living trust may also allow you to retain the applicable tax benefits with the added benefit of avoiding the probate process. If asset protection is a major concern during your lifetime, certain types of irrevocable trusts, such as the Tennessee Investment Services Trust, are best suited for your needs but may require you to give up some control of the property.
The bankruptcy code may provide additional protections for a primary residence (e.g., your state may have a homestead exemption). Section 26-2-301, Tennessee Code Annotated, provides an individual owner of real property a $5,000 exemption, whereas, married couples who “jointly own and use real property as their principal place of residence” enjoy a $7,500 exemption. However, in some states, such as Florida, transferring your primary residence to a trust may eliminate the homestead exemption because the trust rather than you (the debtor) will be deemed to be the owner of the residence. If this situation could apply to you, it is important that you meet with a knowledgeable estate planning attorney before transferring your primary residence to a trust.