One easy way to destroy your estate plan: Real Estate and refinancing
The mortgage business is booming. Historically low interest rates have motivated people to refinance their homes. However, refinancing your home could have a detrimental impact on your estate plan without you ever realizing it.
How your name appears on the deed to your home affects what happens to it when you die. Real estate can be “owned” in several different ways.
When the title lists You (and your spouse) as the Owner
When you own your real estate solely in your name or jointly with a spouse or other person, refinancing your property has little impact on determining who will receive your interest in the property upon your death.
If your name is the only name on the deed to the property, your Last Will and Testament controls who will receive the property at your death. If a lender still has a lien against the property to secure the loan, the mortgage will need to be paid off before transferring the home to the new owner as directed in your Will. One of the jobs of the executor (in Colorado called a personal representative) is to make sure all debts of the deceased individual are satisfied before the property is transferred.
If you do not have a Will, your family will likely have to file an intestacy proceeding at the probate court before they can transfer your property to your heirs. “Intestacy” means you died without a will. In that case, Colorado state law determines who gets your property. It is usually your spouse or your children.
If you jointly own your property with another person, whether it be a spouse, child, multiple children, or friend, Colorado law also determines how that property will pass at your death. For example, if you own property with a spouse as joint tenants with rights of survivorship, upon your death your spouse would file an affidavit (sworn statement) and a death certificate with the county recorder in order to take full ownership of the property. However, if there’s a mortgage, the bank may insist that the loan be paid off first or that the surviving joint owner requalifies for a loan to ensure that the surviving joint owner can continue to make the payments.
When the title lists a Trust as the owner.
Creating a Revocable Living Trust and properly funding it avoids probate and protects your loved ones. A Living Trust owns your accounts and property, including real estate, so that those accounts and property are no longer technically owned by you which means there’s no need for probate. While you are no longer the technical owner of your assets, you still have the ability to manage and control all assets as trustee of the trust, and the ability to use those accounts and property however you want as the beneficiary of the trust.
When you refinance property titled in the name of a trust a lender often requires you to change the ownership of the property from the trust back to you as an individual. Once the property is in your name, the lender will make the loan and you, as the owner of the property and borrower on the loan, will sign all of the paperwork to close on the mortgage. This is because banks don’t loan to trusts, they loan to people. Ideally, after the loan is closed, the title company assisting with the title work will prepare a deed to transfer the property from your name back into the trust.
Unfortunately, we’ve seen a number of title companies miss the step of transferring the property back into the trust. As a result, you may die thinking that the property is titled in the name of the trust. Then, when the successor trustee prepares to sell the property, they discover that the home is still in your name rather than in the trust. In this case, the family will be required to open a full probate in order to sell or transfer the property.
If you have a Pour-Over Will that accompanies your trust, as most comprehensive trust-based estate plans do, the will would guide your property through the probate process and eventually into the trust. Although this still requires your family to go through the probate process, this also ensures that the property will be distributed the way you want. However, this requires the added expense and delay of probate in Colorado.
Titling Problems Between Spouses
Problems can also arise during the refinancing process if a property is owned by only one spouse. For example, assume a couple has been in a second marriage for two years and brought their separate property into the marriage. One spouse owns a home with lots of sentimental attachment, where they raised children from their first marriage, and now they want the home to go to those children at death. If that spouse wants to refinance the mortgage, that spouse needs to make sure the property stays in their individual name, rather than joint tenancy or tenants in common with their new spouse.
If title was inadvertently changed, the property would be owned fully or partially by the surviving spouse at the original owner’s death, regardless of any estate planning documents (will or trust) stating differently. Instead of just taking advantage of better interest rates, the refinance would disinherit the owner’s children.
This is not what the property owner wanted. But without careful supervision of the refinancing process, mistakes like this happen regularly, creating huge headaches for families and leading to years of litigation.
Know who is listed on the title of your real estate
Understanding is the first step. If you are planning to or have recently refinanced a property, give us a call so that we can make sure that your lender, the title company, and you know that the property is titled correctly. Mistakes made in the refinancing process are often found too late. Failure to properly coordinate a refinance with your estate plan will affect you and your loved ones, and it needs to be fixed before something happens to you. Call us today. We are available for in-person and virtual appointments.
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