Key Considerations For Incorporating Real Estate Into Your Estate Planning
Successfully navigating issues pertaining to estate planning and real estate in New York is involved, but does not have to be as complicated as you may fear. To start, though it may seem hard to believe, simply looking at your deed to see who actually owns the property can prevent most issues from arising at all.
In New York, for example, if you share the ownership of your property with your spouse, it will automatically pass to them. However, if the deed language is unclear and does not explicitly state that you and your spouse own the property, New York will assume you are only tenants in common.
After examining the ownership of the property, figure out if you have the ability to make relevant provisions in your estate. If you do, determine what kind of provisions you want to make. Think through the following questions as you do:
- Do you want to direct that the real estate be sold upon your death?
- Do you want to give it to someone such as a spouse, children, or someone else?
- Do you want someone to be appointed, like a trustee, to hold the house in trust for one of your grandchildren who is currently underage but will inherit it when they come of age?
Estate Taxes On Real Estate Holdings
As you know, the laws surrounding estate planning and real estate in New York are constantly changing. Years ago, people would seek to have their deeds transferred to their children because it was such a simple process. I was able to take care of these requests with no issues. However, what eventually happened was the children became responsible for the capital gains tax when they decided to sell the house. This makes what was otherwise a straightforward matter a bit more complicated!
Let’s say a house was purchased 50 years ago for $50,000, and it’s now worth $500,000. To determine tax implications on a transaction like this, you would subtract some of the expenses of closing and renovations, but ultimately the children would wind up paying capital gains tax on the difference of roughly $450,000. Why? Because the children would forgo what’s called a stepped-up basis. This establishes the value of the house the children are selling at the time they take ownership of it, not when their parents purchased it. This can have huge implications on capital gains taxes, turning the difference from $450,000 to $50,000, for example.
This is all possible by putting the house in a trust. Depending on how the house is transferred, it’s possible to not list a house in your will; instead, it becomes part of everything you generally own. If this is not done, it will be taxed for state tax purposes. If a house passes outside of a will, for example, and a deed is in more than one name or a deed is in the name of a trust, then it would also pass outside the estate and is not taxed for estate tax purposes.
There are even different types of trusts where you can skip generations as to who receives things within it, which would allow for some tax savings.
The topic of estate tax quickly becomes very intricate and complicated. For this reason, I highly recommend you consult with a skilled estate planning attorney. In these instances, I also intentionally seek out my clients’ financial planners or accountants to work together and find the optimal solution.
The Impact Of Wills Or Trusts On Transferring Real Estate
As mentioned earlier, the ownership of a house, as per the deed, determines how it passes upon the death of an owner. If the house is owned as joint tenancy or tenants by the entirety (typically for married couples), the property automatically transfers to the surviving owner, bypassing the need for a will or a trust.
However, if the house is owned as tenants in common or by an individual, it can be included in a will. Upon the owner’s death, the named executor is responsible for probating the will. The court issues letters or certificates indicating the representative’s authority, and then a new deed can be signed to transfer the property according to the deceased person’s wishes.
Alternatively, a trust streamlines this process by naming a trustee who can automatically sign a new deed without involving the court and going through probate. Trusts offer added benefits, such as avoiding probate entirely and providing more flexibility and control over asset distribution.
Managing Real Estate With A Power Of Attorney
A power of attorney typically becomes void upon a person’s death, meaning the agent can no longer make decisions on the principal’s behalf. During the principal’s lifetime, the agent has specific powers granted to them by the principal, the person who creates the power of attorney. These powers can be broad, such as giving the agent the authority to handle matters related to the principal’s house, like paying the mortgage, renting, selling, or obtaining a new one.
On the other hand, the powers can be more limited, allowing the agent to handle specific tasks like paying bills, managing taxes, or renting certain parts of the property while excluding others, such as selling the house or evicting the principal. The principal decides and specifies the extent of the powers they want to delegate to their agent when they sign the power of attorney.
Funding A Trust To Provide Income For Beneficiaries Via Real Estate
It is possible to fund a trust with a real estate deed. If a person owns a piece of property, they can sign a deed transferring the property to the trust, making the trust the new owner of the property. The signer will need to name a trustee who will be responsible for things such as making payments.
Using real estate in a trust to provide income to beneficiaries is a bit more complicated, however. First, the property would have to generate income unless you want the trustee to be able to sell the house. This tends to mean that the property needs to be income-producing, that is, rented out. Nevertheless, any income collected from renting the property can be distributed to the beneficiaries as long as the details are specified in the trust.
Issues Related To Jointly Owned Or Co-Owned Real Estate
When I review a client’s deed, I first check how the property is owned. If it’s owned individually, we discuss the client’s wishes for the property after their passing. On the other hand, if the property is held jointly with someone else, the decision has already been made, as it will automatically pass to the co-owner(s) upon their death.
Estate planning often revolves around assessing the assets an individual has and considering the options available to them. Sometimes, there may be limited flexibility. For example, if the deed states that the property will go to a specific individual, like a brother or sister upon the owner’s death, then that provision is fixed, and no other changes can be made.
However, in the case of a tenancy in common, where co-owners hold distinct shares in the property, I can help clients make provisions for their percentage of ownership and decide who they want to pass that share to in the event of their passing.
Challenges And Pitfalls Of Including Real Estate In Your Estate Planning
Contrary to what most people believe, you cannot give away a percentage of a real estate property that automatically passes to someone else when you die. Be very careful to avoid giving a joint-tenant property to someone. It simply won’t work.
There are different types of trusts that can help you achieve your goals. A revocable trust is where you can keep control of the assets you put into the trust, which has implications for controlling what happens to your real estate. If, instead, you put a real estate property into an irrevocable trust, you must completely give up ownership and control of the property. This is especially important if Medicaid were to be a future concern for you.
You need to know very clearly what type of vehicle you are transferring ownership of your real estate into. You also need to know the tax ramifications of transferring real estate. Many people say, “Oh no, I don’t want to be bothered doing all that. Just transfer the deed to my kids.” This is usually when I have to explain the possibility of them paying capital gains.
Others say, “You know what, I’m giving my kids a gift, and once I’m gone, it’s not my problem.” These people typically don’t want to be bothered with all of the tax and estate preparation; they just want to know that the house is not in their name.
To make well-informed decisions about real estate transfers and avoid these pitfalls, seeking advice from a knowledgeable estate planning attorney is highly recommended. They can guide you through the complexities of trust arrangements and tax considerations, ensuring your real estate plans align with your long-term goals and your loved ones enjoy the fruits of your labor in the smoothest transition possible.
For more information on Estate Planning & Real Estate In New York, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (914) 358-9755 today
