How to Hold Legal Title to a Primary Residence
A complete estate plan involves not only signing wills, trusts, and powers of attorney, but also reviewing and updating the legal ownership and beneficiary designations for assets. Without this step, the intentions of even the best-written estate plan can be frustrated. Each type of asset (e.g., retirement accounts, life insurance policies, brokerage accounts, real estate) involves different considerations. How to hold title to a primary residence is a critical consideration.
The first step is to determine how title to a residence is currently held. This information can be found on the deed that the owner received following the purchase of the home. However, if the deed is not available (perhaps because it was thrown in a filing cabinet decades ago and forgotten), the current ownership can often be obtained from the Recorder of Deeds of the county where the property is located. County governments were perhaps not at the forefront of the digital revolution, but many real estate records can now be found online. (Care should be taken, however, in relying on online records, especially for older deeds.) The online search tools for several Chicago-area counties can be accessed here: Cook County, DuPage County, Will County and Lake County. (Note that the person listed on the property tax bill for a residence or the borrower on a mortgage is not necessarily the same as the legal owner of the residence.)
How to Hold Title
Determining how to own title to a primary residence involves three separate – and sometimes competing – considerations. First, it is generally advisable to hold title in a manner that bypasses the requirement for a court-supervised probate estate upon death, thereby avoiding the associated cost, delay, and publicity. Second, a degree of protection from creditors is sometimes available depending on how title is held. Finally, the method of owning title may be part of an estate tax planning strategy. Title to most residences is held (a) in an individual name, (b) for a married couple, as "tenants by the entirety," or (c) in a revocable trust. These are not the only methods of holding title to real estate – in highly specific cases, an irrevocable trust, limited liability company, or land trust may be advisable – but they are by far the most common.
Holding title to real estate in the individual name of one person is generally not advisable. Upon the death of the owner of the property, a court-supervised probate estate is required before the property can be transferred or sold. This is true regardless of the value of the property. Even though a "Small Estate Affidavit" can sometimes be used to administer some estates with a value under $100,000, this procedure is unavailable for real estate.
For a married couple, holding title to a primary residence as "tenants by the entirety" has two significant advantages. First, upon the death of one spouse, the entire ownership interest in the property will pass to the surviving spouse without the need for a probate estate. Second, a residence held in tenancy by the entirety is generally protected from the creditors of one spouse, and only a creditor of both spouses can reach the property. Tenancy by the entirety is only available in certain circumstances, however: It is only available to a married couple, it is only available for the couple's primary residence, and the deed must explicitly create a tenancy by the entirety. Additionally, if property passes to a surviving spouse outright via a tenancy by the entirety, it cannot be used to fund a "credit shelter trust" (an estate tax planning mechanism commonly employed by married couples).
Title to a residence can also be held in a revocable trust. A properly funded revocable trust has the benefit of bypassing the court-supervised probate process with respect to assets held in the trust. A revocable trust does not provide any protection from creditors. However, for married couples, holding title in the name of one spouse's revocable trust can be part of a "credit shelter trust" strategy, or may be used to reduce Illinois estate taxes by "equalizing" assets between the two spouses. (For more on equalizing assets and the Illinois estate tax, see this article.)
Transferring title to a residence requires the execution of a valid deed, which should then be recorded with the Recorder of Deeds in the county where the property is located. Depending on the locality, additional documentation may be required. For example, the City of Chicago requires a "full payment certificate" stating that all utility charges have been paid before a property is transferred. The holder of any mortgage and the provider of homeowner's insurance should also be notified of the transfer.
Transferring title to real estate can add additional time and expense to an estate plan. However, when considering the cost of a court-supervised probate estate, the loss of a home to a creditor when protection may have been available, or the imposition of unnecessary estate tax, proactive planning regarding the title of a primary residence can more than pay for itself.