Real estate is more than just your primary residence. It can include other real estate such as a vacation home or a rental property. Depending upon the type of real estate you own, the ideal form of ownership can vary. Below, we take a look at the different types of real estate and make suggestions about the best form of ownership for each.
Primary Residence
Because of the special tax treatment a primary residence receives, you need to very carefully consider how your home is owned. In applicable states, “tenancy by the entirety” offers married couples creditor protection from the creditors of one of the spouses (with a possible exception for federal tax liens) while still preserving relevant tax benefits. It also allows the automatic transfer of ownership to the surviving spouse upon the death of the first spouse, without court involvement. Transferring ownership of the primary residence to a joint revocable trust may also be an option if you live in a state that allows the tenancy of the entireties protection to transfer to a joint revocable trust. Ownership by the trust also means that the real estate will not go through the lengthy, expensive, and public probate process but will instead be handled according to your wishes as specified in the trust document.
If you are single, owning the property in your sole name allows you to take advantage of tax benefits for primary residences. Similarly, transferring ownership to a revocable living trust may also allow you to retain the applicable tax benefits with the added benefit of avoiding the probate process. If asset protection is a major concern during your lifetime, certain types of irrevocable trusts are best suited for your needs but may require you to give up some control of the property.
Also note that the bankruptcy code may provide additional protections for a primary residence (i.e. your state may have a “homestead” exemption). However, in some states, transferring your primary residence to a trust may eliminate the homestead exemption because the trust will be deemed to be the owner of the residence rather than the debtor. If this situation could apply to you, it is important that you meet with a knowledgeable estate planning attorney before making any transfers of your primary residence to a trust.
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