A local home with a porch in Edgartown, Martha’s Vineyard, Massachusetts, USA.
Wolfgang Kohler | Lightrocket | Getty Images
This version of the article first appeared on CNBC’s Inside Wealth Newsletter. This is Robert Frank, our weekly guide to Net-Worth Investor and Consumer. Sign up to receive future editions directly in your inbox.
Large-scale wealth transfers have led to great real estate transfers, with up to $25 trillion real estate, passed in families and owned by older generations who fought.
According to Cerulli Associates, $105 trillion is expected to be passed down to baby boomers and older generations by 2048. Real estate, including spare facilities, holiday homes and investment properties, is expected to be a major factor. According to the Federal Reserve, Silent Generation and Baby Boomers own a combination of nearly $25 trillion in property.
However, there is a dispute in property. The wealth advisor says communicating property is increasingly fulfilled with both financial and emotional pitfalls for families, ranging from taxes and maintenance costs to disputes over ownership and use. The simple solution is to sell it and split the revenue.
“Some people want to keep their homes, others don’t,” said Jere Doyle of BNY Wealth. “A real problem is there will be a fight. There will be a disagreement. You will not have a perfect situation.”
But lawyers and wealth planners say there are measures that allow families to pass through the property more effectively and minimize taxes, costs and family battles. There are five secrets to the success of real estate inheritance, including Park Avenue apartments, vineyard beach houses, and Montana ranches.
1. Transfer the property through your will or trust to avoid major tax bills.
Passing homes for vacations is the most difficult, according to Elisa Rizzo of JP Morgan Private Bank. Her clients often reduce their major housing in later years, but the family continues to cling to the second home.
Rizzo, Head of Family Office Advisory for JP Morgan, said: “Vacation homes are places where people go and whether they’re ski houses in Vermont or holiday homes in Nantucket, they create special memories for each other.”
Doyle advises you to give away long-standing real estate before you die. If the heir chooses to sell the property, they must pay capital gains tax on the valuation of the property as their parents originally purchased the property.
“Give your life and your kids will get your cost base,” said Doyle, senior estate planning strategist at BNY Wealth. “One thing people need to keep in mind is that the senior generation probably didn’t pay a terrible lot for their wealth.”
There are ways to minimize tax burdens, such as using a qualified private residential trust. But if you can afford to wait, according to Doyle, it is best to leave the real estate to your heirs with your will or death trust. If the heir later sells the property, they will have to pay capital gains tax on how much they are grateful since the house inherited it.
2. Use LLC and trusts to protect your home from lawsuits.
Rather than having the heir own the property directly, the lawyer recommends placing the home in a limited liability company and setting up trust in the interests of children who are interested in the LLC.
These legal operations protect the assets in several ways. For example, if a villa is rented and the tenant slips and falls, the heir will not be personally liable for the damages.
“Other assets, stocks and bonds are not subject to creditor claims,” ​​Doyle said.
It also protects the heirs from the siblings’ debt, according to Dangriffith, the wealth strategy director at Huntington Private Bank. For example, if one heir filed a file for bankruptcy, the LLC structure prevents creditors from placing liens in the shared home, he said.
You can also save on transfer tax by giving interest to the LLC that owns the property, rather than listing the heir’s name on the deed, Griffith said. These partial interests are illiquid, allowing parents to claim a discount on taxable value.
3. We’ll outline who will use the house and how to do it.
Parents can implement rules in their LLC sales contracts. According to Laura Mandel of Northern Trust, clients can use the document to prevent the home from falling into the hands of their children’s spouses.
“Normally, families want to retain these characteristics along their pedigree,” the top trustee said.
Parents can restrict LLC interest from transferring to the child’s surviving or previous spouse. Mandel said that well-drawn trust would make it difficult for a spouse to contest it in court. These sales agreements include acquisition clauses that allow the heirs to purchase a spouse.
Parents can also use the documents to guide you on how to use the property, including how many holiday weekends each child will get, who are entitled to a renovation, or whether they can rent a house or use it for a wedding.
Putting these issues indifferent can cause a fight between the brothers. Mandel recalled a set of four brothers who had a large ranch in the west that he frequently rented out. After complaints that the ranch felt like a “VRBO,” Mandel helped the brothers reach an agreement on how to use their property.
4. Put liquid assets aside for the maintenance and insurance of the House of Representatives.
Money is the most common trigger for family feuds, Griffith said. The inherited home could soon be a financial burden unless parents secure cash to pay for the maintenance fees.
“What’s inevitably happening is that one person pays the bill and the person has to ask for money from his siblings or cousins, and sometimes those people don’t pay, so there’s an enormous increase in responsiveness,” he said. “Or they say, ‘Hey, I’m the one who pays all the bills. Why can’t I use this more often than anyone else?”
Doyle recommends that parents have entered into life insurance contracts to use liquid assets such as marketable securities or award them to the trust. This spending allows the siblings to hold the house without having to afford to share the costs.
“In many cases, there may be kids who can afford to pay the maintenance fees, and how do other people treat them equally?” he said.
However, the management agreement should still include a contingency plan to split the costs if the trust is dry. This is especially important for waterfront homes that are prone to erosion or susceptible to erosion.
5. Be prepared for the possibility that some heirs would like to cash out.
According to Mandel, parents often want their children to keep their homes. However, even if the heirs agree first, they may change their minds later. Perhaps they’re tired of sharing a home with their cousins, or the death of a family changes the equation, she said. For example, Mandel worked with a pasture-equipped family to unexpectedly die the only sibling with practical knowledge of the property, overturning the living sibling’s plan to run the ranch.
It is important to plan the possibility that some or all of your heirs might want to cash out. Doyle proposes to create an acquisition clause that will allow the heirs to purchase the profits of their brothers LLC. The assets of the trust can also be used to purchase the brother’s profits to the LLC.
“What you have to build in any plan is to understand that people’s circumstances and circumstances can undoubtedly change,” he said. “Maybe they will have kids, or their job changes, or their health. Things will change.”
This may be difficult for parents to reconcile, but Griffith said that keeping the heirs’ hands tied down will defeat the purpose of the villa.
“Your grandson had nothing to do with this place, no one lived here, no one grew up here. No one cares. He said, “If someone else who really cares about it can enjoy it, is that so bad?”
