For many clients, one of the primary objectives of estate planning is to avoid having their real estate go through probate, the court process that oversees the orderly distribution of an estate. Clients who have personal experience with probate or have heard stories about probate from family or friends often want to avoid subjecting their own heirs to this expensive and time-consuming process. Fortunately, various methods exist to transfer real estate outside of probate, including the use of life estates, transfer on death deeds and living trusts.
A life estate, recognized under Minnesota Statutes Section 500.01, occurs when a person retains or obtains the right to use, possess and control real estate during their lifetime while someone else has an ownership interest in the real estate subject to the life estate interest. The person with the right to possess the property for life is known as the “life tenant” and the person who is given ownership of the property subject to the life estate is known as the “remainderman.” Upon the death of the life tenant, the remainder interest merges with the life tenant’s interest and the remainderman owns the entire right to the property. A life estate may be created by deed, inheritance or court order.
When created by deed, a life estate is quick, easy and inexpensive to set up. The primary expense is the cost of drafting and recording the deed. Upon the death of the life tenant, the title to the property is transferred to the remainderman by filing an affidavit and a certified copy of the life tenant’s death certificate with the county recorder. The reservation of a life estate allows the life tenant to have exclusive possession and control of the property during their life and the ability to control how the property is passed to their heirs. However, the creation of a life estate is not revocable by the life tenant, and consent of the remainderman is required to sell the real estate. Also, because the remainderman has an interest in the property, the remainderman could have a judgment or tax lien against them that attaches to the property.
Clients often believe that life estates will shelter their property against medical assistance claims, but this is not entirely true. In 2003, the Minnesota legislature passed a law allowing liens to attach to a portion of the value of any life estate created after August 1, 2003. If a transfer to a remainderman occurs beyond the 60-month look-back period, under current law, the life tenant may be able to protect that remainder interest from medical assistance liens. However, if the remainder interest is conveyed for less than fair market value, the Department of Human Services (DHS) considers the transfer to be an uncompensated transfer, which can disqualify the life tenant from medical assistance during the look-back period.
A transfer on death deed (“TODD”), codified under Minnesota Statutes Section 507.071, is a deed that conveys an interest in real estate from a “grantor owner” to a “grantee beneficiary” that expressly states that the deed is only effective on the death of the grantor owner. If the grantor owners are joint tenants, the TODD becomes effective on the death of the last joint tenant to die. Similar to a life estate, a TODD is a quick, easy and inexpensive way to avoid probate, with the primary expense of a TODD being the drafting and recording of the deed. Upon the death of the grantor owner, the title to the property is transferred to the grantee beneficiary by filing an affidavit, a certified copy of the grantor owner’s death certificate and a medical assistance clearance certificate with the county recorder. However, unlike a life estate, a TODD may be revoked by the grantor owner at any time. Since the transfer is not effective until the grantor owner’s death, there is no risk that a judgment or tax lien against the grantee beneficiary will attach to the property while the grantor owner is alive. For the same reason, a TODD will not affect a grantor owner’s eligibility for medical assistance or make the real estate an unavailable asset for medical assistance purposes.
A living trust, addressed by the Minnesota Probate Code in Minnesota Statutes Section 524, is made while the person establishing the trust is still alive. A trust is created by the transfer of property by the owner (known as the “grantor” or “settlor”) to another person (known as the “trustee”). Typically, the grantor will designate themself as trustee and their spouse and children as the beneficiaries. The trustee holds the title to the property and manages the property for the benefit of the beneficiaries. Upon the death of the grantor, the trust property is distributed outside of probate according to the terms of the trust.
Unlike life estates and TODDs, transferring real estate through a living trust is a more expensive process. A living trust is costly to have drafted. Further, after the trust is established the grantor must transfer the real estate into the trust. A living trust, however, is the best mechanism for dealing with difficult and unusual estate planning issues because a trust is extremely flexible. Similar to a TODD, a living trust will not shelter property against medical assistance claims.
Life estates, TODDs and living trusts are all viable methods for keeping real estate out of probate. For simple estate planning, a TODD is likely the best option. Although a life estate can be equally effective, the risk of naming a non-spouse on one’s title poses too great a risk for this author to recommend outside of rare occasions. For complicated issues where comprehensive estate planning is required, a living trust should be strongly considered.
Joseph Heck is an attorney at Fryberger Law Firm. He can be reached at Fryberger’s Cloquet office at (218) 879-3363.
The material in this article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.