Planning for what happens to one’s property after death is a complex process. Understandably, one must consider emotions, family history, and financial implications, among other factors, but it is vital to have a plan in place for your real estate investment when the inevitable happens.
The process of passing down a home is not as simple as it may sound. There are many legal avenues people can choose to ensure that their real estate investment ends up in the intended hands after they pass away.
Passing down property
“There are a variety of ways to successfully pass your real estate holding down to the next generation,” says John Wood, an attorney with Grant Park Legal Advisors. “The route one chooses will depend on several factors and their own unique circumstances.”
“Joint ownership, or joint tenancy, is the most common way to pass down real estate,” Wood explains, adding that this form of ownership must be clearly stated on the property deed. “Many states will default to tenants in common, resulting in each person’s share being divided among their heirs rather than the property vesting in one owner.”
In joint ownership, the joint owner may not have any requirements beyond simply surviving the other owner on the deed, which is beneficial as it allows one to avoid the probate process. However, there may be tax consequences to adding a new person’s name to the joint ownership, so it is important to consult an attorney before deciding on this route.
Transfer of Death Instrument (TODI)
A TODI is a newer way to transfer real estate upon an owner’s passing, though exact restrictions and guidelines for TODIs vary from state to state. A TODI does not change the present ownership of the property, and one may still sell the property or borrow against the property at any time.
The TODI can also be revoked or changed to reflect one’s changing wishes, so this option may offer more flexibility and could be a good choice for those who own multiple properties outside their home. In addition, the TODI is typically less costly than a trust or recording a new deed.
“As the property does not transfer and there is no current change in ownership, there should be no tax consequences with this process,” Wood says.
Trusts are one of the most widely known avenues for estate planning. The grantor will set the terms for the administration of the trust, defining how the trust is to be run and who the beneficiaries will be. A trust is not limited to real estate, making it a favored vehicle for estate planning for those with more assets outside their home.
A less commonly used form of trust is the irrevocable trust. This is used in some estates to protect assets from creditors, such as nursing homes, or to place certain assets outside the estate for tax purposes.
“In both cases, these are complex legal documents that individuals need the assistance of a competent estate planning attorney and, potentially, their CPAs to avoid taxation and legal pitfalls,” advises Wood.
Limited Liability Company (LLC)
This form of estate planning is used to shield assets from creditor claims and divide ownership and income between multiple generations. The operating agreement will define and restrict the rights of ownership, decision-making, and transfer of assets between the members.
“As this is a complicated structure, it should not be entered into with our consultation with attorneys and tax planners,” says Wood.
A will is the most basic way to pass down real estate, but it may also be the least efficient. “A legal process known as probate is required to administer the will, requiring the appointment by the courts of the executor as nominated in the will or someone else if the nominated executor does not wish to act,” Wood explains.
The executor is then granted letters of office. These documents give the executor the legal authority to gather the assets of the estate, pay the estate’s creditors, and distribute the assets and properties of the estate as directed by the will.
Passing without a plan
If a person passes away without a set plan for what should happen to their real estate, their estate then enters probate, which could result in one’s property being sold off or distributed in ways one did not intend. It is particularly perilous in blended families. To avoid this process, it is advisable to have a plan in place.
Challenges with passing down property
Passing down real estate is one of the primary ways of building generational wealth, but it is not without its challenges, as there are state-specific estate tax implications to consider when passing down real estate. While these are typically imposed only on real estate worth millions of dollars, it is crucial to be aware of tax consequences associated with the estate planning route one chooses.
According to Wood, the Garner St. Germain Act allows the heirs to a property to continue to the decedents’ mortgage without refinancing the property. With the low interest rates of the recent past, this may prove a significant benefit.
“When you inherit a property, you inherit the Mortgages and other liens associated with the property,” says Wood. “In some cases, it may become prudent to disclaim the inheritance. In others, the concern may be the mortgage, and given the recent period of low interest rates, there may be advantages to keeping the mortgage on the property rather than refinancing it.”
Seeking the advice of an experienced attorney or advisor is the best way to ensure that your real estate investments are passed along in the best way possible. Planning for what happens to your property investments should be a part of an overall estate plan that can save your loved ones from unnecessary stress and worry after you are gone.
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