As part of my work as an estate planning attorney, I meet a lot of people who have recently had a spouse pass away. I find that most of these people are not at their best when that has happened. Oftentimes, they had been married for several decades, so the loss of a spouse is quite devastating. I understand that is the case, so the first thing I do is offer sympathy and condolences, and then I listen to what the surviving spouse has to say. Often, the surviving spouse is concerned about how to get the house, and everything else, into their name only…and then they will tell me that they need to re-do the will since one of the spouses has passed away.
The good news is that in most cases, when the first spouse passes away, the surviving spouse is often able to quickly and easily get the house transferred to just the surviving spouse, but that is not always the case. The titling of the house makes a huge difference when a first spouse passes away. And when the surviving spouse passes away, that is when real problems can occur with passing a house on to the next generation.
At that point, most people want things to be automatic, but that is not the case. Instead, homeowners and real estate owners need to be intentional about what they do for an estate plan, and nothing is automatic. Even when a house or other real estate does transfer smoothly, paying off loan balances, and other financial considerations come into play, so anyone who owns real estate definitely needs a good estate plan.
What Happens to Real Estate When the First Spouse Dies? Understanding Joint Tenants vs. Tenants in Common
When a first spouse dies, the surviving spouse inherits the house most of the time. Most married couples own their homes as joint tenants, which means that when two people own the real estate, and one dies, the other owner will now own the entire property because the joint owner has died. The surviving spouse needs to record a death certificate, and possibly an affidavit to tie the name on the death certificate to the real estate deed (Why? you may ask? – The names don’t always match on those two documents!), with the county clerk and recorder to show the deceased person no longer owns the property, but doing so transfers ownership solely to the surviving spouse. This is a fairly simple and straightforward process.
However, even though joint tenancy is the most common form of ownership for married couples, not all married couples own real estate as joint tenants. Some own the property as tenants in common. This means that each spouse owns half of the property and that each spouse may determine where their half of the property goes after the death of each spouse. Most often, the real estate is to go to the surviving spouse, but if that is done in a will, then a probate case will still need to be opened to handle the transfer of ownership.
I had this happen recently to a client whose husband passed away over 2 years ago. She owned the property as tenants in common with him, so she needed to open up a probate case to get proper legal authority to transfer the house into her own name prior to putting the house in a trust. Fortunately, I caught this as part of my preparing an updated estate plan for her, or else more difficult legal problems to unravel might have come up down the line, after she died.
A common mistake real estate owners make is to not know how their property is titled, or the implication of such titling.
You want to check how your real estate is titled, (before you meet with an attorney – or after if you don’t have time or know how to check your real estate titling before you meet with an attorney) so you know how it will transfer at the time of your death. You can change how real estate is titled, but you need to check the exact wording of the titling before you pass on to ensure real estate goes where you want.
What Happens When the Second Spouse Dies?
When a second spouse, or the surviving spouse, passes away, joint tenant, or joint titling, is often not part of how real estate is owned. Most parents do not set up joint tenancy with their kids, so the property will not transfer according to the joint ownership. Instead, the property will transfer according to what the second, or surviving spouse, dictates shall happen with the real estate in the second, or surviving spouse’s will or trust. Many people assume that the real estate will transfer to their kids automatically, but that is simply not the case.
There really is no such thing as “automatic” when it comes to transferring real estate in estate planning.
Even with joint tenancy or joint ownership, the surviving owner needs to notify the county properly. But, there really are no automatic provisions for transferring real estate from the second, or surviving spouse, to the children. The closest thing is a beneficiary deed, which transfers ownership to named beneficiaries at death of the real estate’s owner when a death certificate is filed with the county clerk and recorder’s office. Absent a beneficiary deed, and much more commonly, a will or a trust needs to specify where the real estate will go. A “will” means real estate transfers to the named beneficiaries through the probate process, while a trust can transfer assets outside of probate. In either case, you need to specifically, and intentionally dictate who will receive the real estate assets after you die.
A common mistake is assuming that just because you want a real estate asset to go to someone at your death, that it will.
On the contrary, if you don’t have a will or trust to handle your real estate assets if you are the second to die, you may be subject to the default rules, and your real estate may go to someone you did not intend. It is far better to specify where your real estate will go upon the second death of a spouse, than to hope the default rules reflect what you want.
Even With the Best of Plans, Some Problems Persist
When someone inherits real estate, they may inherit a property that has a loan attached to the real estate property. When someone dies, the outstanding balance of the loan will immediately become due. The person who inherits the real estate will need to pay off the loan, either by selling the property, refinancing the property, or paying off the loan balance due out of their own funds. This is just part of the way loans work.
I have lost count of the number of people who ask me if the loan just goes away when someone dies. Wouldn’t that be great for those inheriting property? Yes! But, it may not be so great for those issuing the loans, so it doesn’t happen. In fact, when someone pays off a loan on a property they inherited, it is usually because a life insurance policy paid out enough money to cover the cost of the loan, not because the loan just went away.
There are many types of loans, including traditional mortgages, reverse mortgages, all-in-one loans, and other types of loans. Most loans are not transferable from one person to another, especially upon death, so any loan balance will need to be paid off if the loan is against real estate transferred at your death.
A common mistake is failing to consider the loan on a real estate property and how it will be paid off by those who receive the real estate.
Loans don’t just disappear, and if a loan is only in one spouse’s name, a refinance might need to be done after a first spouse’s death. So, you need to plan for what will happen with a loan on real estate, if the house isn’t owned free and clear. Sometimes life insurance can cover the difference, but sometimes that is not the case. In any case, when considering who should receive real estate, the status of a loan needs to be part of the conversation.
You Can Avoid Most Mistakes by Having a Good Estate Plan
Most of the common mistakes with real estate can be avoided simply by having a good estate plan that shows how real estate assets should transfer at the first and second deaths of a spouse. Setting up the estate plan should include a discussion of plans for any outstanding loans, even if the full plans for a loan are not written into the estate plan. The plan can account for loans, but is most concerned with the transfer of ownership. Working with an experienced estate planning attorney can minimize the problems and avoid common mistakes for real estate owners.