Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Retirement Strategy: How to Transfer Real Estate to Family

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Some assets require special estate planning. One such asset is what I sometimes call heirloom real estate, or family real estate.

This is a property that’s been in the family for a while that you’d like to continue to keep in the family.

Heirloom real estate includes vacation homes or other second homes, farms, a longtime residence and similar properties, but not business or investment properties.

Often the family real estate has been the site of pleasant memories for many family members.

As the senior generation ages, it can be the place where three or more generations gather at least once a year, usually around a holiday.

As families spread around the country or world, the family real estate can become the one anchor or source of stability.

To maximize the probability the property will remain in the family and help keep the family together, you have to give the details some thought and work with your family members and financial planner.

The inclination of most people is to leave the real estate to their children jointly in their wills, much as they do with the rest of their estate.

That’s usually not a good move for heirloom real estate for a variety of reasons.

If the property is in a different state than where you reside, your estate will have to be probated in two states. The state where you reside will control the probate of most of your estate.

But real estate is probated in the state where it is located. You can avoid that second probate by having the property owned through a trust, limited liability company, or other entity.

There are many other practical reasons why leaving the property jointly isn’t a good idea.

Once a property passes to the next generation, they have to work out ownership issues. They need to develop a schedule or procedure for when each owner can use the property, who uses which bedrooms and other facilities, what can be stored or left at the property, and similar issues.

Maintenance, care and other routine expenses often become big issues. Each sibling has to agree to pay a share of these expenses.

Will the expenses be shared equally, or will the cost-sharing be based on the amount of time each uses the property or the ability to pay?

Some expenses are mandatory, such as real estate taxes. But other expenses can be discretionary, and someone has to decide if and when they will be incurred.

Major upkeep and even renovations can cause conflicts. Even when it is clear that a repair is needed, the co-owners might disagree on the quality, cost and timing of the replacement.

Almost inevitably, at least one sibling will want to sell the property while others don’t.

Perhaps one sibling now is living far away from the property and hardly makes use of it. Or the sibling has a cash need.

Sometimes when the other siblings are unwilling to sell and unable to buy the other sibling’s share, one of the siblings will sell his or her share to an unrelated person.

Joint ownership also creates problems when one of the owners divorces or passes away. The property could bring the whole family into the divorce proceedings.

The passing of a co-owner raises the issues of whether that owner’s share goes to the surviving co-owners or the heirs of the deceased.

Many of these problems are resolved by having the heirloom real estate owned by an entity.

In many cases, a limited liability company (LLC) is the best choice.

The LLC provides the liability shield of a corporation with the operating and tax flexibility of a partnership. Limited partnerships, trusts and corporations also are viable choices.

The parents who currently own the property should create the LLC as soon as possible. They will be the original owners of the LLC and set up its operating rules.

Over time, they can give or sell ownership interests to the children. Or they can hold the LLC for life and leave its ownership to the children through their estates.

The parents set up rules for sharing and maintaining the property that can be implemented on a trial basis while the parents are alive. Changes can be made as experience is gained.

The LLC also allows the creation of a committee or other structure that enables some of the owners to make decisions about the maintenance, improvement and other management of the property. Again, creating the structure early allows it to be refined over time.

An important feature of the LLC structure is that it can prevent the property from being sold outside the family.

The LLC bylaws can prohibit any owner from selling his or her shares to someone who isn’t a family member.

The bylaws can also create a process for one member, or other owners, to sell to the LLC and provide a formula for determining the price and payment terms.

Of course, the LLC doesn’t resolve all of the cash flow and money issues. The co-owners must still be willing and able to finance continuing ownership of the property.

The money problems are best resolved when the parents leave a cash fund or a life insurance policy to the LLC.

This can fund some or all of the ownership for at least a period of time, perhaps for an extended period.

It might also provide a way for the other owners to buy out the interest of anyone who wants to sell. Without a cash fund or insurance policy, the siblings must still deal with the cash flow issues.

The LLC can also be a good tax planning tool when the estate might be subject to federal, state,or inheritance taxes.

Giving shares of the LLC and establishing minority ownership interests can reduce the value of the property for tax purposes.

Before creating an LLC or other structures, the parents should be sure that the children really want to retain the property in the family after the parents are gone, and able to afford it.

Some children simply won’t have the money, or they’d prefer to spend it on other things. Other children believe that after the parents are gone, visiting the property will trigger sadness and regret rather than happy memories.

There are ways you can ensure a property remains heirloom real estate. But have candid conversations with the next generation to ensure they understand the full picture and are interested in retaining the property.

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