The principal residence often represents the largest asset in an estate. Although the sale of a residence after the owner’s death can generate a substantial cash gift for beneficiaries of the estate, in many cases the residence must still serve as the home by one or more survivors. This often is the case when one spouse dies and the surviving spouse needs to remain in the residence. When preparing an estate plan, most married couples intend for the surviving spouse to be permitted to remain at the residence as long as they wish. Planning for this outcome can be tricky and has a unique set of issues to consider. To help you protect this most valued asset, we have summarized some basic concepts in real property. (This is a basic explanation which does not discuss the use of trusts).


In Maryland, there are four basic ways in which title to property is held: 1) sole ownership, 2) tenants-in-common, 3) joint tenants and 4) tenants- by-the-entireties. Most of us own our homes either as sole owners or a tenants-by-the-entireties (simply, married joint tenants). Married couples who own property as tenants-by-the-entireties are guaranteed the right of survivorship. That means whichever spouse survives will take sole title to the home by operation of law. A sole owner must direct who takes title after death through a will. If a sole owner has not done so, the property will pass through intestate succession (fractional portions based on survival of a spouse and other heirs).


Although many married couples own their residences jointly (by-the- entireties), it is not uncommon to have one spouse be the sole owner of record. This may not present a problem as much as a choice when preparing an estate plan. If the owner continues to hold sole title to the residence and he/she were to die first, that property would pass through their probate estate. That is not necessarily a good thing or a bad thing, just something to be considered as part of the individual’s estate plan. If, however, it is the intention of the owner-spouse to avoid leaving a probate estate, the title of the property must be transferred from sole ownership to both spouses as tenants- by-the-entireties, thereby securing title in the surviving spouse and avoiding the probate estate. Transferring title in this manner is a “no-consideration” transfer and can be accomplished with relative ease and little expense.


In addition to being our largest asset, the home is also often our single largest source of debt. This has become even more true these days with low interest rates spawning home equity lines of credit, home equity loans, and home equity everything else. It is important to understand that these loans/lines of credit are additional mortgages. That is to say, they are secured by the value of your home above and beyond the outstanding debt on the first mortgage.

When preparing estate plans, it is critical to take any mortgage on the residence into consideration. If a residence passes to a surviving spouse subject to a mortgage and that spouse does not have the means to pay the mortgage, the residence could be lost in foreclosure. This is the worst possible outcome for a decedent who intended for their surviving spouse to remain comfortably in the family home.


The best way to avoid this outcome is by ensuring the mortgage does not pass to the survivor along with the residence. Below are some basic ways to accomplish that goal.

Life Insurance:
The simplest way of protecting your surviving spouse is by ensuring a sufficient amount of life insurance benefits exist to pay off any existing mortgage. Unfortunately, many people do not consider the outstanding mortgage debt when calculating how much support their spouse will need. The safest choice is purchasing a “whole” life insurance policy as early as possible. These policies will last until the death of the insured, so you don’t have to worry about the policy expiring. This is in contrast to the “term” policy which generally has an expiration date. Many people often have life insurance policies through their employers. These policies are almost always “term” policies which expire, or are substantially reduced, upon or shortly after retirement. Remember, when considering life insurance policies, the older you are, the more expensive the premiums.

Mortgage Life Insurance:
Another version of the basic life insurance is the mortgage life insurance. This is an insurance policy tied to your mortgage. Simply put, whenever the insured individual dies, this policy will pay off the existing mortgage on your home. Many of these policies will even follow the insured from home to home and mortgage to mortgage. Though, as with basic life insurance, the longer you wait to purchase the policy, the more expensive.

Ensure Supplemental Assets Exist:
Although this is certainly easier said than done, an individual can direct the mortgage be paid out of their estate. In order to do this, there must be sufficient assets in the estate. These assets must be readily liquid in order to generate the cash needed to pay off the mortgage. For example, if an individual directed their most valuable property be given away as a specific bequest, there may not be enough assets in the residuary estate to pay off the mortgage on the principal residence.


If these options are not realistic and the property will have to pass subject to the mortgage, here are some issues to consider.

* Is the mortgage in one spouse’s name? If so, contact the mortgage company to determine if the surviving spouse will be able to assume the existing mortgage. With so much refinancing going on these days and interest
rates creeping up from all-time low rates, many of those mortgages are NOT assumable. If that is the case, it would be best to get the other spouse onto the mortgage now to avoid this problem. You will have to put the other spouse on the deed as well, if solely owned.

* If the mortgage is in both spouses’ names, will the death of one trigger an adjustment under any provisions of the mortgage? Look closely at the “default” and “acceleration” provisions for any language indicating a possible shift in your responsibilities upon the death of a spouse. There may also be a separate provision specifically dealing with the death of a spouse.


Properly arranging your estate plan to protect the principle residence is of utmost importance. But, by understanding the potential problems, you can look at your individual situation and take the necessary steps to ensure the safe passage of your home.



So, you have made some good purchases over your lifetime. A few stocks, some bonds, maybe even some real property. Those properties blossomed and are now worth a pretty penny. The problem is, that if you sell these properties to finally realize the fruits of your labor, the capital gains taxes will put a sizeable dent in your net value. The Private Annuity Trust may be a good option for you. With this trust, you can “sell” your appreciated property in exchange for an annuity equal to the fair market value of the property plus interest. The trust then makes annual annuity payments to you based on the value of the property sold in exchange for the annuity. The real benefit is that you only pay capital gains taxes on the annual annuity payments. Even though you have effectively sold all of your appreciated property, the capital gains taxes are stretched over the lifetime of the annuity. Although your gains are also stretched out, you have secured a steady annual flow of income and avoided paying large up-front capital gains tax. In addition to recovering the principal value of the property through annuity payments, you are earning interest on the principal, thereby increasing your overall net cash flow with this trust as opposed to selling the property outright.