Jenny Rozelle, Host of Legal Tea
Cautionary Tales - Real Estate Mistakes - Episode 96
Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle! Today’s episode of Legal Tea is a cautionary tale, where we talk about real-life cases with real-life clients with real facts – they’re things me or my office have worked on. For today’s episode, we’re going to be talking about a few different stories, ahem cautionary tales, involving real estate – you see, real estate works just a little differently than other assets. You’ll see that play out in some of these cautionary tales – that, people think real estate works similar to owning, say, a bank account jointly. But, it does not. So, let’s just dive in, shall we?
The first story is the most recent occurrence – this case just landed in our office like a month ago. We got a call from, let’s call her, Sally – Sally’s Dad had passed away and as she explained it, she “only put his name on the house because the bank was concerned with her low credit score.” It was, by most people’s account, her house – he didn’t live there, he didn’t help with the bills, etc. Though, “on paper” that house and the mortgage was technically “just” in Dad’s name. Well, I’m sure you know where this story is going to go given what we talk about here on Legal Tea … Dad passes away. Instead of going to see an estate attorney, Sally just kept on paying the bills and living there. Well, here’s where this story gets a little extra weird!
The house catches on fire and it’s nearly a total loss. Of course, the insurance company gets involved – and that’s where Sally starts connecting the dots. Because the house is in her Dad’s name, the insurance company is only willing to pay Dad’s estate – which would be governed by her Dad’s Will or if no Will, then the state’s intestacy laws (which are like a default estate plan for people that don’t do a Will). At this point, like I said this is a really new case, we don’t believe Dad has a Will – meaning that his estate will go to his four children. So yeah, the proceeds from the insurance company (you know, for Sally’s “house” said in air quotes) will be split between Sally and her three siblings. Rut roh…
We immediately thought, “Okay Sally, do you think your siblings would just say ‘we don’t want our share’ called disclaiming … their share of the estate/house/insurance proceeds?” At that point, Sally looked up at me and said, “Jenny, one of them would disclaim it in a heartbeat; her and I are close. But, the other two are a big ol’ question mark because one is in jail and the other is, sort of, estranged and lives in Mexico.” I thought to myself, but clearly did not say out loud, “Oh nooooo!” So, we’ll see how this cautionary tale plays out – it’s too new in the case to even guess how things go because Sally’s sibling, who is incarcerated, and the other sibling, estranged and in Mexico, are sort of wild cards at this time. Nonetheless, the point being – Sally AND her Dad should have paused when they were going through the real estate transaction to make sure they were setting things up well. THEN, once the real estate transaction was done, Dad should have ensured his estate plan supported “what” he would’ve wanted to happen – which likely would have been to transfer ownership, at his passing, to Sally.
Ready for a second “cautionary tale” story about real estate? Let’s go!
Let’s name this client – Beatrice. Ol’ Beatrice had a friend who “lost everything to a nursing home” so to protect her and her family, she transferred her house to her three children. When I say transferred the house, I mean … she literally Deeded the house from her name to her children’s names. Fast forward some time … then bam! Her magnificent plan went sideways – one of her children passes away. (To clarify, Beatrice and her other two children were still living.) You see … the thing to take away from this cautionary tale/story is that property like a house, land, etc. (we call it “real property” in lawyer world) operates differently than most assets. To compare, think of a joint bank account. If one of the joint owners passes away, the account naturally and legally defaults in ownership to the surviving joint owner.
That’s not how real property like a house works – instead, property gets transferred totally how the Deed is written up. And all too many people try to whip up Deeds without professional guidance – and they get themselves in trouble because they don’t know that there are different types of ownership – and those different types play out very uniquely if an owner passes. In Indiana, and I assume in many other states, there are 3 types of property ownership for a house, land, etc. Let’s run through them quickly:
1. Joint Tenants w/ Rights of Survivorship – This means that 2 or more individuals own the property and if an individual passes, the property stays with the surviving individuals. If we have Bob, Tom, and Cliff as Joint Tenants w/ Rights of Survivorship, Cliff dies, Bob and Tom now own the property – it doesn’t go according to Cliff’s estate plan or anything.
2. Tenants by the Entirety – This operates just like the Joint Tenants w/ Rights of Survivorship, but it is exclusively reserved for married couples. So if Bob and Mary are married, Mary dies, the property automatically stays with Bob. Sometimes, on a Deed is merely says “husband and wife” – if so, in Indiana it’s presumed that it defaults to the Tenants by the Entirety classification.
3. Tenants in Common – This means that every owner owns a respective interest – so say we have Bob, Tom, and Cliff and they own a property as Tenants in Common. Bob owns 1/3, Tom owns 1/3 and Cliff owns a 1/3. Cliff dies. His 1/3 would be distributed according to his estate planning – meaning if his Will left everything to his spouse, Bob, Tom, and Cliff’s wife are about to become owners together.
The kicker is that if the Deed is silent – it defaults, again here in Indiana, to Tenants in Common, which is kind of odd, right?! So say someone pulls a Deed off the internet and just puts a property in their name and another person’s name (not their spouse) …. And does not put any classification (i.e. Joint Tenants with Rights of Survivorship) behind it, the law presumes it’s Tenants in Common. That is exactly what happened to this client, Beatrice. Beatrice transferred her house to her three children and didn’t put any classification as to how she was transferring to them – so it defaulted to Tenants in Common between the three children. So as I stated before, one of her children ends up passing after she transferred her house. Guess what had to happen? I’m afraid to tell you…!
Well, that child, legally speaking, owned a 1/3 interest in Beatrice’s house – because the child passed away, we had to PROBATE the 1/3 interest to get it “back” to Beatrice and her two living children. The deceased child was married, had children, etc. so because his 1/3 interest had to go according to his estate plan – which left everything to the spouse – thankfully, the spouse of the deceased child agreed to “disclaim” her interest and let is pass “back” to Beatrice and her two living children. (Please note, she didn’t have to! She could have caused a scene!) However, where the story stinks, is that for probating the deceased child’s estate (for the 1/3 interest), they had to hire an attorney, like us…well they did hire us, to get it straightened out.
Shall we do a quick third “cautionary tale” before we wrap up? Let’s go!
This one … sure left me scratching my head when I heard what happened. So, we met with a lady, let’s name her Dorothy, that during the conversation brought up a piece of property … I think, if I remember correctly, it was a parcel of farmland. Anyway, Dorothy proceeds to share that many years ago, her and her now-deceased husband purchased the property from a neighbor. They thought, “Oh, they don’t need those silly lawyers involved – we’ve got this!” So, they gave the neighbor money for the land … and the land was theirs! So she thought…
At that time, Dorothy shared that they were unsure “how” to title the property – you know, should they put it in both their names? Just one of their names? In their kids names in case nursing homes get into the picture? They went into what I like to call analysis-paralysis … where someone stews about something for so long that they freeze. They don’t move. That’s what happened – then, life must have gotten in the way because THEY NEVER ACTUALLY TRANSFERRED THE PROPERTY INTO THEIR NAMES! You heard me right. So, immediately we ask Dorothy, “Okay, so what’s up with the neighbor? Are we still cool with them?” She responded, “Oh, they died many years ago.” We were like, “ummmm … what?!”
Well, to keep a long story short, since the property was technically in deceased people’s names at this point, the neighbor’s family had to open probate to have the legal authority to sign the Deed to transfer the property to Dorothy – while they were agreeable (THANK GOODNESS!), they basically told Dorothy that they’d be agreeable to signing it over if she paid the entire bill for the attorney; essentially, they were like, “Sure we’ll be nice and sign it over, but you’re going to foot the bill. Not us.” So, that’s exactly what ended up happening. We had them all waive a conflict of interest (since it was kind of a weird case) and we opened probate up for the neighbor and worked with ALL of them to “clean everything up.” That reminds me of something that a friend, who is a realtor by trade, said to be once before. They said, “You know – I don’t understand why people are so careless with property. Oftentimes, a house is a person’s biggest asset. Heck, if you have farmland or rentals, it amplifies this point. Why do people not get professionals involved when doing property transfers?!” My friend is so right. People do their own Deeds that they pull online or pull from the county recorders’ office. If they do it wrong or ASSUME something that is NOT accurate, they have NO idea the consequences of their action – whether it be a consequence they deal with in their lifetime OR their kids/beneficiaries lifetime. If it’s not done right and not done well, SOMEONE will have to clean it up eventually – either you or them. I think all three of these stories exemplify that … to a T.
Alrighty … let’s wrap this episode up and shift to a sneak peak of next week. We are back to the current events/current trends topic – where we talk about something I’ve seen or run across, maybe on the news or social media, that I think would be interesting on here. During next week’s episode, we are going to talk about something a little unique. I had a client recently share with me about “human composting” which may make some a little squirmy, but since this podcast talks a lot about what happens when we pass away, I think it’d be interested to talk about a new trend in the post-death space called human composting. So, yeah! We’re going to talk about that next Tuesday, Legal Tea Listeners. Until then, take care and be well!