A Slice of Real Estate Advice

My middle kiddo celebrated her 15th birthday last month. In our family, the birthday kid gets to select what I make for dessert in honor of their special day. This year Natalie picked cheesecake, likely one of the most finicky desserts to prepare when making it from scratch: getting the chilled ingredients out in time to let them come up to room temperature, hand crushing the graham crackers for the crust while making sure the crumbs are fine and consistent throughout, mixing the cheesecake batter ingredients so they’re perfectly combined but not over mixed, wrapping the pan in layers of foil so the water bath doesn’t leak into the springform pan and ruin the crust, allowing it to bake just long enough being careful to not under or over bake it, letting it cool with the oven door open just enough to allow the cooling process to be controlled to avoid cracks in the surface of the cake, and further chilling in the fridge overnight. Can’t forget to make the sour cream topping with the plan to spread it on the chilled cheesecake just before serving. It is a nerve-wracking experience, a true labor of love, that takes very careful planning every step of the way. While making Natalie’s cheesecake, it struck me that the same attention to detail needs to be applied to estate planning and especially so with real estate.

Let’s explore some options worthy of consideration for the administration and distribution of real estate assets:

Will or living trust: Creating a will or a living trust is essential for estate planning. It allows you to specify how you want your real estate property to be distributed after your death. A living trust can be particularly useful if you want to avoid probate, a legal process that can be time-consuming and costly.

Joint Title: When real estate is held in joint title and one of the joint owners passes away, the ownership of the property typically passes to the surviving owner(s) automatically. This is known as the right of survivorship. Here are a few common forms of joint ownership:

Joint Tenancy with Right of Survivorship (JTWROS): In this type of ownership, when one owner dies, their share automatically passes to the surviving owner(s) without going through probate. The property will be solely owned by the surviving joint tenant(s).

Tenancy by the Entirety: This form of ownership is available only to married couples and provides similar rights of survivorship as joint tenancy. If one spouse dies, the ownership automatically transfers to the surviving spouse.

Tenancy in Common: In this form of ownership, each owner has a distinct and separate share of the property. When one owner dies, their share of the property passes according to their will or the laws of intestate succession rather than automatically to the other owner(s). The deceased owner’s share may go to their heirs or beneficiaries as determined by the legal process.

Lady Bird Deed: A Lady Bird Deed, also known as an enhanced life estate deed or an enhanced warranty deed, is a legal instrument used in estate planning to transfer real property to designated beneficiaries upon the owner’s death while retaining the right to use and control the property during their lifetime. The key feature of a Lady Bird Deed is that it allows the property owner to retain full control and use of the property during their lifetime, including the ability to sell, mortgage, or lease the property without obtaining the beneficiaries’ consent. Upon the owner’s death, the property automatically passes to the named beneficiaries without going through probate.

Transfer on Death (TOD) Deed: Also known as a beneficiary deed or a revocable transfer on death deed, a TOD is another estate planning tool used to transfer real property to designated beneficiaries upon the owner’s death. With a TOD, the property owner retains full control and ownership of the property during their lifetime, similar to a Lady Bird Deed. However, unlike a Lady Bird Deed, a TOD does not grant the owner the right to freely use and control the property during their lifetime. The owner can only transfer the property to the designated beneficiaries upon their death.

Lifetime Gifts: You can reduce the value of your estate and potential estate taxes by gifting real estate during your lifetime. The annual gift tax exclusion allows you to give a certain amount each year to individuals without incurring gift taxes. This year that figure is $17,000. This strategy can be utilized with an intrafamily in which payments are forgiven up to the annual exclusion amount. A lifetime gift can provide tax advantages if the property appreciates in value.

Qualified Personal Residence Trust (QPRT): A QPRT allows you to transfer your primary residence or vacation home into an irrevocable trust while retaining the right to live in the property for a specified period. This strategy can help reduce estate taxes by removing the property’s value from your estate while allowing you to continue living in it.

Family Limited Partnership (FLP) or Limited Liability Company (LLC): These entities can be used to hold real estate property and provide various benefits for estate planning. By transferring the property to an FLP or LLC, you can retain control and management while gifting or selling ownership interests to family members over time.

Charitable Remainder Trust (CRT): If you have a valuable property and charitable intent, you can transfer it into a CRT. This trust allows you to receive income from the property during your lifetime, with the remaining value passing to a designated charity upon your death. It provides income tax benefits and potential estate tax savings.

Life Insurance: Life insurance can be a useful tool for estate planning, especially if you have real estate property that you want to pass on to your heirs. By designating the policy proceeds to cover estate taxes or provide liquidity for property transfers, you can ensure your heirs have the necessary funds to handle any estate-related expenses and thus will not be faced with the need to sell real estate to cover the tax liability related to your estate.

Just like making a homemade cheesecake, there are times in which a well thought out estate plan can go wrong or no longer fit your desires. Periodic review of your estate plan to ensure your current plan is appropriately set up is always a worthy exercise, and this is particularly true for your real estate assets. Whether you have one home or multiple properties, proper planning is essential to ensure you’ve accounted for how your heirs will inherit the property and account for all the associated tax implications of the strategy that will be deployed. It’s important to consult with your trusted advisors to evaluate which strategies are most appropriate for your specific situation, as laws and regulations may vary depending on your jurisdiction. Consider reaching out to your client centric team for a review of your real estate titling in conjunction with your overall estate plan to determine if an update is needed, maybe over a slice of cheesecake.