When this topic was proposed to me, I initially thought, “What the heck. Where did it come from, and how should I respond?” But after cogitating on the topic for some time, it finally hit me. This is a topic we deal with literally day in, day out!
In virtually every scenario we deal with, the client owns some parcel of property, from the smallest estate plan for the client (living or deceased) that owns a lot with a mobile home on it, to a lake property in Idaho, to time shares, to mineral rights in Texas, or to a farm client owning several thousand acres and wanting to hold the farm/ranch together for their heirs.
As I think about property ownership, whether in regards to intaking an estate, drafting a trust for the client, or forming a limited liability company (LLC), the first thing we do is have our real estate paralegal CHECK TITLE. She gets me an assessor’s printout on the parcel or parcels. Then she pulls title (deeds) on the property, all to ascertain EXACTLY how title is held.
I could go on and on about the disconnect between how the client says their title is held and how the deed of record shows title. We’ve learned the hard way; always check the title record.
Typically we order a title report on the property to ascertain how title is held. It is amazing to me how often title is NOT held as the client says, such as:
- The mobile home is not listed as real property, and the client can’t produce the certificate of title.
- Chain of title to the client is bad, i.e., a missing deed from the party from whom the client purchased the property (not returned by the bank escrowee years ago or misplaced by the client who forgot to or didn’t know he was supposed to go record the deed).
- A deed of trust that was never released when the client paid off the property 20 years ago, and now the trustee is unascertainable.
Get the idea? The client has a title problem to one or more of their properties. So, before we can close the probate and convey title to an heir or contribute property to the new trust or complete a gift deed or contribute the property to the new LLC we want to form, we must CLEAN UP the title.
That may be as easy as scouring the client’s old files and finding the original, unrecorded deed or the original certificate of title to the mobile home, to tracking down the seller and obtaining a new or replacement deed. Sometimes, the title issue becomes more complex, requiring litigation, such as a quiet title action to clear title, which of course can be quite expensive to the client.
Once we’ve checked and cleaned up any and all title concerns TO your property, we’re ready to deal with how DO you want to hold title.
Assume you own an out-of-state property, such as a lake property in Idaho, a farm property in Oregon, or a mineral interest in Texas. Typically, our goal is to avoid an out-of-state probate (assuming you are a Washington resident) called an ancillary probate. We typically want to hold title either in a simple revocable trust or an LLC. Holding the title in a revocable living trust avoids probate and can provide for succession to your heirs as you want.
Be careful using an LLC, because if you are a Washington resident already having a substantial estate, the Washington estate tax law includes the full value of your out-of-state property held in an LLC, but not if title is held in a trust. It’s complicated.
Some states allow for special deeds that convey title to a surviving spouse (or named beneficiary), called a beneficiary deed. But remember, that doesn’t protect the deed if both spouses pass, which is why looking into a possible simple revocable trust or LLC might be a better option.
An LLC is typically my favorite entity of choice for holding title to your property, especially if dealing with farm/ranch property and, often, rental properties. An LLC can be structured pretty simply, such as a single member LLC to just hold title to property — the lake parcel, for example — where you have no intent to presently gift or include family members as owners. The LLC can also be more complex, containing provisions providing for matters such as:
- Control, i.e., successive managers.
- Control succession — permitted transfers/transferee provisions/prohibiting ownership by nonfamily, etc.
- Providing for a mechanism protecting value, such as a family member in bankruptcy, divorce, or improper succession planning.
I often include a call provision to give the original members (parents) the option to buy back LLC units gifted or bequeathed to future family members who become difficult to deal with (won’t sign necessary FSA forms, etc.). I’ve been there, done that!
When setting up the LLC, the property owned by the LLC doesn’t go through probate or require further transfer. The LLC units held by the decedent would, of course, be subject to probate (unless held in some type of trust).
Sometimes, clients want a “road map” for how some parcels are to be allocated or distributed amongst children when they are gone. We can easily provide this wording in the LLC operating agreement.
A “full blown” grantor revocable living trust is more and more desired by clients. This type of trust remains revocable by the grantors, so they are free to amend or revoke it, just like a will. While avoidance of probate concerns is usually the recited reason for such a trust, your living trust can be set up to contain provisions unique to you and your family heirs. Once title to your property is vested in your trust, it is not necessary to have to retitle it through the probate procedure.
We’ve written articles in past issues of Wheat Life on LLCs, which can be found at wheatlife.org/category/bottom-line/.
In conclusion, understand how you hold title to your property. Are there title issues that you should clean up and deal with rather than passing the problem(s) on to your heirs? Finally, what is the best way for you and your family (heirs) to hold title to your property?
Norm Brock has been representing farm families throughout Eastern Washington, Idaho, and Northwestern Oregon for more than 50 years. He works out of the firm’s Davenport and Spokane offices and can be reached at (509) 721-0392 or brocklf.com.
