What is the Best Way to have my Parent Leave me the Family Real Estate Residence?

A potential client writes to our firm:

Dear Anderson & Pittman:

Good Morning.  I have been discussing a deed transfer with my mother.  Perhaps you can tell us if we even need to do a transfer of deed. I live in a home my mother owns and have paid the mortgage on the home from day 1 (I am not currently on the mortgage or deed). Because she is getting older, she wants to make sure that I can stay in the home in the event of her death. One concern we have is how a deed transfer will affect her current mortgage. We have also read that an heir can assume a mortgage and stay in the home rather than having to transfer the deed. Is that true? Can you please help to direct us on how we should go about this and the process?

Dear Dutiful Child:

Do you have siblings?    Does your mom have any other heirs that might dispute your right to inherit the property?   Does your mom have a will?    If so, you have 3 or more options:

1. The worst is to do nothing and to possibly inherit the property after your mother passes away.  The only advantage to this strategy is that you get the highest possible tax basis in the property if you come onto the title after your mom dies.  But please consult your tax advisor on these matters.   Each possible strategy among these several may have a different tax result when and if you ever decide to sell the house after it is yours.
2. The 2^nd option would be to be added to her deed or to take title entirely by yourself and to apply for an assumption of the mortgage.  Advantages:   you get tax deductions (or did under the old tax law) and title is already in your name when your mom passes on.   Also, if your mom need Medicaid (5 years after her deed to you)  to help with care or a nursing home, she would be eligible without having to pay her equity in the home into the Medicaid fund first.    Disadvantages:   If your mom has an exemption for paying real estate tax due to age and indigence you all will lose that.   Also, if your mom has a falling out with you, she is “stuck” with you in the house.    In the rarest of instances, a mortgage company might be able to foreclose on the house for a violation of the “due on sale clause”.
3. There is something the legislature just created in the past 4 or 5 years called a Transfer on Death Deed (TODD).   That prevents confusion or claims by other siblings or heirs and allows the title to pass automatically to you at your mom’s death.   This type of inheritance has the advantage of not triggering the “Due on Sale clause” because of protections in the Garn-St. Germain Act.    This type of deed is also revocable for your mom up until she dies or loses her mental capacity.
4. There are other estate planning tools we can use that have been around longer than the TODD, such as a deed to you as remainderman and retention by your mom of a Life Estate.  In most jurisdictions, the Life Estate and retaining title under the TODD both allow your mom to keep her real estate tax exemption if she uses it.    The remainderman conveyance is not revocable by your mom.   But you may have to outlive her to get the property.    The Life Estate has a value under the Code of Virginia that your mom may have to pay into Medicaid before she could gain Medicaid eligibility for any chronic medical needs but depending on her age at the time she claims Medicaid, the “spend down” requirement may be minimal.
5. A final way to make sure you inherit the property without interference from siblings, heirs, claimants, lenders, creditors, etc., is by having your mom execute a trust.    There are two main types of trusts she could use for her estate planning that would also benefit you:   Revocable   and   Irrevocable.    The main advantage of the latter is that 4 or 5 years after the property is titled in the trust, there is no Medicaid liability for you as a result of the equity in the property.   One big advantage of any Trust is usually PRIVACY.   It avoids probate and the terms of the trust need not be disclosed to outsiders.

The pricing is a factor that often leads our clients decision making process as to each of these wonderful tools.  Generally I shared the tools in the order of least expensive (NOW) to most expensive now in terms of legal fees.   But they often result in inverse costs savings later depending on what you are willing or able to spend now!    In most cases, we prepare and have a deed recorded for only about $165!    1, 2, 3, 4 can be done in a few days (other than your application to assume the mortgage which might take the mortgage company a couple of months to approve.   5.  Generally takes longer unless you need a “rush” and that might drive up the cost.