Avoid Pitfalls when Transferring Property to Heirs

August 21, 2023

It is not difficult to ensure the smooth transfer of ownership of your property to a spouse, children, or other heirs, as long as you have an estate plan created by an experienced estate planning attorney and know what pitfalls to avoid. Most importantly, you want to avoid these pitfalls when transferring property to heirs, says the article “I’m a Financial Planner: Here Are 5 Mistakes You Must Avoid When Transferring Property to Heirs” from GoBankingRates. If you die without a will, your state’s intestate succession or next-of-kin laws will determine who inherits your house if yours was the only name on the deed.

Next-of-kin succession varies by state, but for the most part, the priority order is first the surviving spouse, biological and adopted children, parents, and siblings, followed by grandparents, aunts, uncles, nieces, nephews, cousins and extended family members.

You’ll want to know how your state treats intestate property to avoid unwanted surprises for your family. For instance, in some states, full siblings are prioritized over half-siblings, while in other states, they are treated equally.

The biggest mistake is dying without a will and an updated deed. In some states, the property will need to go through probate if the surviving heir is not in co-ownership of the house, regardless of what’s stated in the will.

The solution is simple. Add an adult child or the person you intend to be your executor to the property’s deed via a warranty or quit claim deed. This prevents the family home from going through probate and seamlessly transfers to the individual you want to handle your estate after you’ve passed. In particular, this should be done once one spouse in a joint-owning couple dies.

There are four general types of property ownership. The legal system treats them all differently. They are property with the right of survivorship, property held in a trust, property subject to a will and property for which the spouse does not have a will.

If two spouses purchase and jointly own a property, the right of survivorship dictates that the surviving spouse automatically receives the decedent’s half and becomes the sole owner. This is the simplest and easiest outcome, since it avoids probate and the need to alter the deed. However, it’s not always the case.

A surviving spouse might need to change their deed if a partner dies and the deed didn’t automatically transfer property after death. If only one spouse was on the deed, they may have to go through probate (if there was a will) to transfer the home into the surviving spouse’s name. The spouse may need to file a survivorship affidavit and a copy of the death certificate to ensure that the title is properly in their name.

Should you transfer property while you’re still living? It may solve some problems but create others. If a primary residence is transferred to an adult child and they sell it not as their primary residence, it could lead to a large capital gains tax bill. However, if the child inherits the property after your death, the heir will enjoy a stepped-up tax basis and avoids capital gains taxation.

Before taking any steps to arrange for the transfer of the home after passing, talk with the person or people to make sure they want it and the responsibilities associated with owning a home. This is especially true if there’s more than one heir with different opinions.

If children don’t get along or are in different financial positions, leaving one property for all of them to manage together could lead to family fights. Talk with them before putting your wishes into your estate plan to avoid unnecessary resentment and, in the worst case, litigation. Working with an estate planning attorney can help you avoid these pitfalls when transferring property to heirs. If you would like to learn more about property management in your estate plan, please visit our previous posts.

Reference: GoBankingRates (July 26, 2023) “I’m a Financial Planner: Here Are 5 Mistakes You Must Avoid When Transferring Property to Heirs”

Image by Paul Brennan

Family Vacation Home need Planning for Future

July 24, 2023

As terrific as it may be to have a family vacation home, the same reasons it’s a wonderful thing can make it one of the most complex assets to pass to future generations. Everything’s great when the parents are alive and well. Still, over time this changes, as explained in a recent article, “Do family vacation homes foster closeness or animosity?” from The Press-Enterprise. The family vacation homes needs planning if you want it to be around for future generations to love and enjoy.

When parents are relatively young and hosting their children and visitors, life at the family vacation home is easy. Everyone knows the routines of the day, who cooks, who cleans, who is in charge of the barbeque, and where the best swimming is. Parents envision their children’s children coming every summer and enjoying the same relaxed bonding experience.

But life changes, especially as generations pass on. Leaving the family vacation home to all children in equal shares in a will or even in a trust could be a prescription for a family disaster. An idyllic place could turn into a family feud.

Who will be in charge of the vacation home? The eldest child, or the one who lives closest to it? Is one child wealthier than the others and more able to shoulder the costs of maintaining a second home? And as grandchildren grow up and have families of their own, deciding who will have access to the house during peak summer weeks can become acrimonious.

Start by having a family conversation to determine if the children (and grandchildren, if appropriate) want the vacation home to remain in the family. Do they all want it, and how do they expect to use it? Are they considering tearing it down and building a larger home, or could it become rental property?

If only one child wants the home, do they want to inherit it instead of receiving any other inheritance? Are there enough assets to equalize the gift? If not, you could give the child who wants the property the right to buy it from the others or your trust upon your death.

If more than one child is interested in the property, you’ll want to talk with an experienced estate planning attorney to plan the property’s future.

Any time more than one person is going to own a property together, they need to have an agreement detailing the rights and obligations of co-ownership. If the decision is made to keep the vacation home in the family, it may be best to leave it in a trust with specific terms for the use of the property, naming a trustee to manage the trust—one or two people, but not everyone in the family. The trust language must address how and when the property can be sold, who will pay for property taxes, utilities, minor and major repairs, and the terms for passing the property through generations.

If the family decides they’d prefer the property to become a rental property to generate income, consider putting it into a Limited Liability Company (LLC). Each of the heirs may have a membership interest in the LLC, one is designated as a manager, and an operating agreement is created to set out the terms for selling or otherwise transferring a membership interest.

An asset as special as a family vacation home needs and deserves planning for the future. Meet with an experienced estate planning attorney to create a plan for the future, then go and enjoy your time with the family. If you would like to learn more about managing real property in an estate plan, please visit our previous posts.

Reference: The Press-Enterprise (July 2, 2023) “Do family vacation homes foster closeness or animosity?”

Image by Monika Schröder

Keeping the Vacation Home for Generations

April 18, 2022

Many family traditions include gatherings at vacation homes. However, leaving these properties to the next generation is not always in the best interest of the family. Some people try to make a simple solution work for a complex problem, leading to more challenges, as explained in the article “Succession planning for the family lakehouse” from NH Business Review. Keeping the vacation home in the family for generations requires solid planning.

Joint ownership among siblings can lead to disputes about how the home is used, operated and maintained. Some children want to continue using the house, while others may see it as an income stream for a rental property. There may be siblings who cannot afford to participate in the house’s upkeep and need the cash more than the tradition. When joint ownership is presented as a surprise in a will, the adult children may find themselves fighting about the vacation home, with no parent around to tell them to knock it off.

Making matters more complicated, if the siblings live in different states and the house is in a neighboring state, ownership of the real estate at death may subject the decedent’s estate to estate taxes where the property is located. As a result, the property may need to go through probate in an additional state. Every state has its own tax rules, so the transfer of joint property will have to be analyzed by an estate planning attorney knowledgeable about the laws in each state involved.

A sensible alternative is creating a Limited Liability Corporation, ideally while the original owners—the parents—are still living. The organizational documents include a certificate of organization to file with the Secretary of State and an operating agreement. The LLC will need its own taxpayer identification number, or EIN.

The operating agreement governs the management of the property and addresses the operating expenses and maintenance of the property. It should also address the process for a child to cash in on their ownership to other children. LLC operating agreements often include these items:

Responsibilities for operating expenses
Process to transfer member units or interests
Duties for regular maintenance, budgeting and approval of property improvements
Development of a property use schedule
Establishing rules for the home’s use

There are some costs associated with creating an LLC, including annual filing requirements. However, these will be small, when compared to the cost of family fights and untangling joint ownership.

An LLC can also offer personal liability protection from lawsuits brought by renters, creditors, or any litigants. If there is an accident resulting from work being done on the property, the owners may be shielded from the liability because they do not personally own the property, the LLC does.

In the case of divorce, bankruptcy filing, or a large judgement being filed against one of the children, the LLC will protect their interest in the property.

The real estate owned by the LLC is not part of the owner’s probate estate. This avoids the need for a second probate in the state where the property is located. Some states have adopted the Uniform Transfer on Death Security Registration Act, and the LLC membership interest can be assigned along to the terms of the beneficiary designation.

Keeping the vacation home for generations to come provides peace of mind for all in the family. Speak with an experienced estate planning attorney to ensure that the property and the family’s peace is preserved. If you would like to learn more about including property in your estate planning, please visit our previous posts.

Reference: NH Business Review (March 23, 2022) “Succession planning for the family lakehouse”

Photo by Alexey Avilov

Keeping Vacation Home in the Family

March 1, 2022

If your family enjoys a treasured vacation home, have you planned for what will happen to the property when you die? There are many different ways of keeping a vacation home in the family. However, they all require planning to avoid stressful and expensive issues, says a recent article “Your Vacation Home Needs and Estate Plan!” from Kiplinger.

First, establish how your spouse and family members feel about the property. Do they all want to keep it in the family, or have they been attending family gatherings only to please you? Be realistic about whether the next generation can afford the upkeep, since vacation homes need the same care and maintenance as primary residences. If all agree to keep the home and are committed to doing so, consider these three ways to make it happen.

Leave the vacation home to children outright, pre or post-mortem. The simplest way to transfer any property is transferring via a deed. This can lead to some complications down the road. If all children own the property equally, they all have equal weight in making decisions about the use and management of the property. Do your children usually agree on things, and do they have the ability to work well together? Do their spouses get along? Sometimes the simplest solution at the start becomes complicated as time goes on.

If the property is transferred by deed, the children could have a Use and Maintenance Agreement created to set terms and rules for the home’s use. If everyone agrees, this could work. When the children have their own individual interest in the property, they also have the right to leave their share to their own children—they could even give away or sell their shares while they are living. If one child is enmeshed in an ugly divorce, the ex-spouse could end up owning a share of the house.

Create a Limited Liability Company, or LLC. This is a more formalized agreement used to exert more control over the property. An LLC operating agreement contains detailed rules on the use and management of the vacation home. The owner of the property puts the home in the LLC, then can give away interests in the LLC all at once or over a period of years. Your estate planning attorney may advise using the annual exclusion amount, currently at $16,000 per recipient, to make this an estate tax benefit as well.

Consider who you want to have shares in the home. Depending on the laws of your state, the LLC can be used to restrict ownership by bloodline, that is, letting only descendants be eligible for ownership. This could help keep ex-spouses or non-family members from ownership shares.

An LLC is a good option, if the home may be used as a rental property. Correctly created, the LLC can limit liability. Profits can be used to offset expenses, which would likely help maintain the property over many more years than if the children solely funded it.

What about a trust? The house can be placed into an Irrevocable Trust, with the children as beneficiaries. The terms of the trust would govern the management and use of the home. An irrevocable trust would be helpful in shielding the family from any creditor liens.

A Revocable Trust can be used to give the property to family members at the time of your death. A sub-trust, a section of the trust, is used for specific terms of how the property is to be managed, rules about when to sell the property and who is permitted to make the decision to sell it.

A Qualified Personal Residence Trust allows parents to gift the vacation home at a reduced value, while allowing them to use the property for a set term of years. When the term ends, the vacation home is either left outright to the children or it is held in trust for the next generation.

Each of these options allows you the satisfaction of keeping that the treasured vacation home in the family. If you would like to learn more about managing property in estate planning, please visit our previous posts.

Reference: Kiplinger (Feb. 1, 2022) “Your Vacation Home Needs and Estate Plan!”

Photo by Josh Hild from Pexels

Category: Vacation home

Avoid Pitfalls when Transferring Property to Heirs

Family Vacation Home need Planning for Future

Keeping the Vacation Home for Generations

Keeping Vacation Home in the Family

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