Understanding Real Estate Deeds

As an estate planning attorney, I spend a lot of time reviewing deeds to real estate. The laws regarding real estate ownership and transfer are archaic and lead to confusion for many property owners. Perhaps the Q & A format below will help you.

Q: What exactly is a deed?

A: A deed is a written legal document that is used to transfer interests in real estate (also called real property as opposed to personal property). If you review your deed, you will find some key information, including the following: a grantor (seller or transferor), a grantee (buyer or transferee) and a legal description of the property.

Q: Are there different types of deeds?

A: Yes. Here are the most common types of deeds you are likely to run across: Quit Claim Deed – In this deed the seller/transferor does not guarantee that they own 100% interest in the real estate, but does guarantee that they are transferring all of the interest they do own. Warranty Deed – As the name suggests, the seller/transferor uses this deed to warrant or guarantee that they own 100% unencumbered interest in the property they are transferring. This is the preferred deed for a buyer/transferee in an arm’s length transaction. The buyer will want a guarantee that they are the only owner on the purchased property. Ladybird Deed – Supposedly named after Ladybird Johnson, this deed is technically called an Enhanced Life Estate Deed. It is used in Michigan to name beneficiaries on real estate to avoid probate. When used properly, it also can provide protection in Medicaid eligibility planning.

Q: Who is in possession of the deed to my home?

A: Likely you have the deed (even if you may not know it). When you purchased your home, with or without a mortgage, the deed was supposed to be recorded and then sent directly to you shortly after the closing. Many people mistakenly think that they are not given the deed to their home until they pay off the mortgage. Not true! You are given the deed up front even with a mortgage. On the other hand, if you purchase real estate with a land contract (essentially, financing from the seller), then you will not be given the deed until the last payment is made on the land contract. The deed is typically held by a third party during the term of the land contract (“held in escrow”). Mortgages and land contracts are two different animals.

Q: What if I cannot find my deed?

A: Don’t worry, a legal copy of your deed is probably recorded with the Register of Deeds in the county you live in. In fact, almost no one will ever ask you for your original deed. Instead, future buyers and their title companies will rely on what is recorded at the Register of Deeds.

Q: How do I get a copy of my deed if I cannot find it?

A: Contact the Register of Deeds in your county and ask them for a copy of the most recent deed recorded on your address. You can also get a copy of your deed online through the county website in most cases. There will be a small fee. Do not rely on information from the assessor’s office. They have information about your property for tax purposes, but not technically for ownership.

Q: Is there anything special about a deed that shows ownership by a married couple?

A: In Michigan, yes there is. If both spouses’ names are on the deed with language that indicates that they are married, then they own it as “tenants by the entireties” which provides some lawsuit protection if only one of them is sued. Property owned as tenants by the entireties cannot be separated to pay a claim against only one of the spouses. If both spouses are sued, then the property does not have that protection.

I hope the information above clarifies some important points concerning ownership and transfer of real estate. A complete mastery of real estate law is very difficult. I owe much of my understanding of real estate law and, for that matter, my approach to breaking down complex legal issues, to my favorite law school professor, Jeffrey Lanning. Professor Lanning once called on me in his Real Property class to ask about a real estate issue in a case and said: “Mr. Saunders, what’s the answer and then tell me why you’re wrong.” He clearly wanted both explanations, and it took many weeks of that class for me to understand the brilliance of his teaching.

Fun Fact: You would know if you ever drove past Professor Jeffrey Lanning. Back in the mid-80s when I was at Wayne State University Law School, Professor Lanning had a large “artificial” pompadour hairstyle and drove around in a huge burgundy Cadillac Eldorado convertible with two bright gold ornate horns on either side of the windshield and a license plate that read “Harv ‘47”. Rest in peace and thank you, professor.

Think Twice Before Preparing Your Own Tax Return

This piece was inspired by a meeting I had with a Trustee and her husband last week. The Trustee was named to manage both of her parents’ trusts after their deaths. Her father died decades ago, and her mother died just last month. Turns out that the Trustee’s husband likes to organize finances and prepare tax returns, including for her parents and their trusts. This proved to be a disaster because he was unaware (and didn’t think to ask) about how the trusts were set up. We will figure it all out eventually, but not without extra time, money and the help of an experienced CPA. These issues could have easily been avoided.

Taxes can be simple or complicated, depending on your specific circumstances. If you are single and retired, or young and just starting out, then doing your own taxes can make sense. However, things can become complicated quickly, and that’s where a professional tax preparer can save you time, money and stress. Here are some factors to consider:

1. If you are involved with a “taxable entity”, then see a tax professional. Taxable entities are enterprises that usually have their own tax identification numbers. LLCs, business partnerships and irrevocable trusts are taxable entities. (Revocable Living Trusts are not taxable entities because they use your Social Security Number as their tax id and thus are invisible tax-wise).
2. If you receive a Schedule K-1, then see a tax professional. A Schedule K-1 is a federal tax document that is used to report income, deductions, losses and dividends from taxable entities like LLCs and certain trusts. You could get a Schedule K-1 if you benefit from someone else’s trust (i.e. you are a beneficiary) or you have your own business. Any Schedule K-1 you receive becomes a part of your personal income tax return and without properly understanding them, you can cause yourself problems. One mistake I sometimes see is the filing of a personal tax return by a beneficiary before a Schedule K-1 is received by that beneficiary. That often requires going back and amending your return, ugh!
3. If you or a loved one have lots of medical expenses, then see a tax professional. Not only are those costs potentially deductible, but they also can dictate how best to prioritize which assets to withdraw from. (Hint – it’s often better to withdraw from a tax deferred account like an IRA in years when you have large medical expenses for the write-off). A good tax professional will walk you through the options and can save you a lot of taxes.

Sure, tax professionals can be expensive but so can mistakes made without proper guidance. The Trustee I mentioned at the beginning of this piece is about to find that out. I don’t want that to happen to you. In general, a good tax professional is more than worth the price.

Fun Fact: My wife has quite a backyard garden that includes bird feeders and inevitably, squirrels. It’s fun to see how resourceful a squirrel can be when they like what’s in the well-protected bird feeder. Not only are they resourceful, but they are also tricky. They sometimes engage in “deceptive caching” wherein they dig a hole and vigorously cover it up again without depositing a nut. Scientists think it is to throw off potential food thieves

Understanding Risk and How to Use It to Your Advantage

The term “risk” is as important as it is hard to define. The dictionary defines it as “a situation involving exposure to danger.” Of course, the word danger itself is ambiguous. Danger could mean all sorts of things from physical to mental to financial hardship. That’s why the term “risk” is so important – it applies to all elements of your life. In its broadest sense, risk is simply the probability of a negative outcome.

Risk is essential to quality of life because it drives innovation, fosters growth and opens doors to new opportunities. Identifying risk is different from being fearful of something. If you just gauge your fear in decision making, you’ll get nowhere. But risk can help you make better decisions if you approach it objectively. When you make an important decision, including a financial decision, consider this approach to risk:

1. Identify all potential risks. Lawyers are trained to do this quite easily because we essentially have been trained to look for what can go wrong. You need to sit down and make a bullet list of all the things that can go wrong in your important decision.
2. Assess the risks. As to each risk you’ve identified, attach a likelihood (probability) of that risk occurring. In addition, determine the potential severity of its consequences.
3. Develop a risk management strategy. For each risk, based on its probability and severity, determine whether your course of action should be as follows: 1. Complete avoidance. 2. Mitigation. Perhaps a slight alteration in your plan can substantially mitigate the risk. 3. Transferring the risk to a third party. That’s what insurance is all about. If you buy a home on a lake to enjoy lake activities you have a risk of injury to people you invite over. Homeowners insurance transfers that risk to a third party. 4. Accepting the risk. Once you’ve identified the risk and its probability you can decide whether it’s worth simply taking on the risk to enjoy the potential benefits of your decision.
4. Often missed in identifying the risks of a particular endeavor is the risk of not engaging in it at all. In my financial planning business, people sometimes think that if they hold their money in cash instead of in equities they eliminate a huge risk of volatility. While that may be true over the short term, holding all or most of your savings in cash creates a huge inflation risk over the long term because inflation slowly but surely eats away at the buying power of your money. Historically, nothing fights inflation as well as owning stock in good companies.

Risk is inevitable in life. I can think of very few things that I have accomplished in my life that didn’t involve overcoming one or more risks. In fact, I abide by the adage that the biggest risk in life is not taking any risk.

I’ve tried to teach my sons that success in life is directly related to the amount of risk you’re willing to take. However, I’ve also taught them to break down the risk elements of a decision objectively as I set forth above. Hopefully, you will take the time to do the same when making an important decision in your life. Not only will it help you to identify risks, but it will give you much more confidence in your decision-making.