Real and Adequate Considerations: Estate Planning for Real Estate

Real estate is one of the most common types of property disposed of by an estate plan.  For many individuals and families, a house or other real property will be one of the most valuable assets that they will transfer during their lifetimes or at their death.  In order to achieve the best results, certain aspects of the transfer must be considered from the initial planning stages through the completion of the transfer.

The following are the most important factors to consider when planning a transfer of real property:

1. Consider How The Property Is Titled-Property owned by more than one person can be titled in several ways, either with a right of survivorship or without one.  Property titled as “tenancy by the entirety” (which is available only to married couples) or “joint tenancy” have a rights of survivorship and will pass outside of probate to the surviving owner.  Property owned as “tenancy in common” property have no rights of survivorship and passes through the probate process.  Ensuring that jointly owned property can pass outside of the probate process is an easy way to avoid the delay and cost related to property passing through probate.

2. Consider How the Property Is Owned-The simplest form of property ownership is outright ownership.  However, under some circumstances, it may be advantageous to consider the use of a trust or business entity such as an LLC or family limited partnership to own real estate.

Property owned by a trust or business entity can be shielded from certain forms of creditor claims or limit the liability of its owners.  In addition, the use of a trust or business entity may allow the property to be discounted for gift and estate tax purposes.  Finally, for larger families, a trust or business entity may allow for a centralized management and administration of family property.

Owners of condominiums and coops should consult with their respective board of directors before transferring property to a trust or a business entity.  Some boards prohibit the use of one or both of these ownership forms.

3. Consider When A Transfer Should Be Made-The decision of when a real estate transfer will take place requires considering several things.  The age of the transferor, the type of real estate being transferred and whether the transferor wishes to retain an interest in the property for a term of years should all be factored into the decision making process.

Additionally, the cost basis of the property should be determined.  A Gift of real estate during the transferor’s lifetime will result in the transferee assuming the transferor’s basis.   If the property has appreciated significantly since the transferor acquired the property, the transferee will be assuming a large capital gain when the property is ultimately sold.  If the property is transferred upon the transferor’s death, the cost basis receives a step up to the value of the property at the transferor’s date of death or an alternative valuation date six months after the date of death, whichever value is lower.

4. Consider Transfer Taxes-In addition to a potential capital gains tax, the transfer of real estate may subject the transferor or his or her estate to gift or estate tax liability.  Before making a transfer or planning a transfer, owners of real estate should review their financial records with an accountant, estate planning attorney or other financial professional to determine how much of their lifetime gift tax /estate tax exemption has been used.  If the proposed transfer would result in a tax liability, the use of  estate planning instrument such as a qualified personal residence trust (QPRT), an LLC or a family limited partnership should be considered to reduce the value of the transfer for gift or estate tax purposes.

5. Consider Where the Property is Located-Unlike intangible assets such as cash, stocks and bonds, the physical location of real estate will dictate which state’s probate laws will apply.  If an individual owns real estate in one or more states or countries outside of New York, they may be required to file a secondary probate proceeding known as ancillary probate.  This may create an additional burden on the family of a deceased individual at a time when they will already be stretched thin.

Proper titling of the property can protect joint property if a right of survivorship is included.  In other instances, it may be beneficial to transfer the property to a revocable trust or another trust or entity to ensure that the property(ies) will not be subject to ancillary probate.

As with other forms of property, proper planning with real estate can be the difference between a successful transfer and one that is plagued with delay, additional taxes and other complications.  It is essential to take the above-mentioned factors into consideration before preparing an estate plan for your real estate.

Please contact info@levyestatelaw.com for more information about estate planning for real estate.

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