Funding Real Property Part I

In the realm of trust funding, unlike most assets, there are many nuances to funding real estate. To understand how and if we transfer title of real property into trust requires first some background knowledge.

Real property has some unique characteristics and is subject to different laws than most personal property. As a starting point, in North Carolina, real property is not considered a probate asset. Unlike, say an individually owned bank account, real estate that is titled solely in the decedent’s name, is not normally subject to the court’s control in a probate proceeding. Real estate transfers according to the decedent’s will (or according to the laws of intestate succession, should the decedent die without a will), but it is not property that is calculated in determining court fees.

Similarly, since real property is not a probate asset, the upkeep as well as servicing of any lien against the real property (i.e. making mortgage payments) is not an eligible disbursement from the probate estate. In other words, when someone dies with a mortgage on their home, title to the property vests immediately in the heirs, as does the obligation to make any payments towards the property.

Real estate can be brought into the probate court’s jurisdiction if needed. For instance, if the estate is insolvent, it may be necessary to bring the real estate into probate to generate cash for the settling of debts by selling the property.

The next aspect of real estate that should be considered in the trust funding paradigm involves how married couples hold title to real estate. In North Carolina, a married couple typically holds title as Tenants by the Entirety (TBE). TBE is similar to Joint Tenants with Rights of Survivorship – meaning that title automatically vests in the survivor upon the death of the first spouse – but it also includes a layer of creditor protection. The creditor protection comes from the fact that the TBE property is non-divisible to creditors’ claims. For example, if one spouse is sued, and a creditor obtains a judgement against her, it would not be able to enforce the judgement against the home, because it is an entireties property held by the debtor and her spouse. Note though, that the creditor protection is limited: if the judgment was against both spouses, the house could be eligible to settle the creditor’s claim.

The limited creditor protection afforded spouses as tenants by the entirety and real estate’s aspect of being a non-probate asset, are considerations in determining whether and when to fund real property into trust. In our next post, we’ll explore how we fund real estate into trust as well as special federal law that affects are ability to fund real property that is mortgaged.