Financing the purchase of one’s home and refinancing one’s mortgage can each create estate planning traps for the unwary. The traps created may be due to the name on the title or the manner in which title is held. Let us consider two scenarios involving title that can create major problems once someone dies or becomes incapacitated.
The first is when someone lacking good credit purchases or refinances their home. Often the only way such a person is able to secure financing is by involving another person — usually a parent or other family member — with good credit. This person is included on title for that reason solely, even though they may not pay anything towards the purchase price or mortgage payments. Nonetheless, that person is presumed to be legal owner of the property because they are on title.
The problems develop when the family member either dies or becomes incompetent. At death, who succeeds to that person’s ownership share? And during incompetency, how can the property be sold or refinanced?
The answers to these questions are often disturbing. That is, when the family member dies, any share that he or she owned in the home as a tenant in common will pass under his or her will to named beneficiaries or by intestacy to his heirs. This may result in other persons, besides the original owners who involved the decedent, becoming co-owners; a result not intended at the outset when financing was considered the sole issue. Moreover, including the real property interest in the deceased person’s estate may trigger a probate, with all the associated expense, aggravation and delay that probate entails.
In addition, if the family member is ever unable to handle his or her financial and property affairs, then it may not be possible to sell or refinance the home. A court supervised conservatorship may then become necessary.
With proper estate planning, these problems can be avoided. First, the family member’s co-ownership interest should be held as a joint tenancy interest with the other owners of the home, or the interest should be held in the family member’s trust and left to the other co-owners at death. That way, when the family member dies, his or her undivided co-ownership interest passes without either probate or legal dispute to the other original co-owners, presumably as originally intended.
Second, the family member’s incapacity planning should provide legal authority for a responsible person to control the ownership interest. That is, in the event of the family member’s incapacity, an agent under a durable power of attorney, or a successor trustee in the case of a trust, can authorize transactions, including a sale or refinancing.
A different scenario where people may unwarily step into a trap occurs when they refinance their own home. The lender takes title temporarily out of the person’s living trust so that it is held in the person’s name individually. The lien is then recorded against the title in the person’s name individually. If title is not then reconveyed back into the living trust and the person dies holding title individually an unintended probate may then become necessary at the person’s death. The solution is to insist, and double check, that the title company reconveys title back into one’s living trust at the conclusion of the refinancing.
The foregoing illustrates how ignorance regarding the implications of title can result in unforeseen problems at the death or incapacity of a title holder. Consultation with an attorney at the outset can allow one to avoid these problems with the appropriate means.