Whether a primary residence, a vacation home, or a major real estate investment owned indirectly through a partnership, corporation, or limited liability company, many individuals’ real property holdings make up a substantial portion (if not the majority) of their personal wealth. If this accurately reflects your situation, addressing the transfer of your real estate will need to be a central component of your estate plan.
While estate planning with respect to real estate is in many ways similar to estate planning for other types of assets, there are a number of unique considerations as well. In this article, we provide an overview of:
- Options for holding title to real estate for estate planning purposes
- Three key considerations for transferring real estate in your estate plan
- Business succession planning for real estate developers and investors
- What will happen to your real estate if you don’t have a comprehensive plan in place
1. Options for Holding Title to Real Estate for Estate Planning Purposes
When it comes to preparing a comprehensive estate plan, the first step is simply to understand the options that are available. While this discussion usually starts with a discussion of the various estate planning tools, when planning for the transfer of real estate, you need to go back one step further. Simply put, how you hold the title to your real estate matters. If you need to make a change, now is the time to do so.
The most common ways that individuals and couples hold title to real estate include the following:
- Individual Ownership – The first option is to own your property in your own name. Unless you are married (continue reading to learn more) or you make special arrangements, when you buy a piece of real estate, the title will identify you personally as the sole owner.
- Tenants By the Entirety – If you are married when you buy a piece of property, under New York law the default rule is that you and your spouse will own the property as “tenants by the entirety.” This means that, when one spouse dies, the other spouse automatically takes full ownership of the property (assuming that the parties are still married at the time of death). However, this does not mean that you don’t need an estate plan.
- Joint Tenancy with a Right of Survivorship – This option is similar to a tenancy by the entirety, except that (i) it is not limited to married couples, and (ii) in order to establish a joint tenancy with a right of survivorship in New York, the ownership structure needs to be specified in the property’s deed.
- Tenants In Common – If two non-married parties buy a piece of real estate together, the default rule is that they own the property as “tenants in common.” Unlike a joint tenancy with a right of survivorship, with a tenancy in common, when one owner dies, his or her ownership interest transfers to his or her heirs or beneficiaries.
- Beneficiary (or “Transfer-On-Death”) Deed – Although not currently available for properties located in New York, if you own an investment property or vacation home in another state, another ownership option is the beneficiary deed, which is also commonly known as a “transfer-on-death” deed. This works just how it sounds: When you die, the deed automatically transfers to your named beneficiary (or beneficiaries).
- Partnership, Corporation, or Limited Liability Company – Assuming your company has sufficient credit (or you offer a sufficient personal guaranty) to secure a loan, you can also own your real estate holdings through a legal entity. The primary reason for doing so is to mitigate your risk of liability, though there are a number of other potential benefits (including estate planning benefits) as well.
- Asset Protection Trust – Another option (though like beneficiary deeds, not available under New York law) is to set up a domestic asset protection trust. However, while asset protection trusts offer important benefits, they do not always provide the control and flexibility that is desirable for estate planning purposes.
- Revocable Living Trust – The last option we’ll mention is the revocable living trust. For a variety of reasons, the revocable living trust has become one of the go-to tool for estate planning; and, importantly, it can be used for real estate holdings.
2. Three Key Considerations: Liquidity, Taxes, and Probate
When it comes to choosing not only (i) the way you own your real estate, but also (ii) the estate planning tool(s) you use to transfer it after your death, there are a number of considerations to keep in mind. Three of the top considerations are liquidity, tax consequences, and avoiding probate:
- Liquidity – Is there a chance that you will need to sell your property during your lifetime? If so, certain options are better than others. A lifetime gift (which can have significant tax benefits under certain circumstances) may be out of the question as well.
- Tax Consequences – Different transfer methods have different tax consequences. With the maximum estate tax rate in the U.S. at 40 percent, you will want to make sure that you properly address any gains and choose a transfer method that limits your estate’s tax obligations.
- Avoiding Probate – If your real estate transfers through a will (or if you do not have an estate plan that covers your real property), it will need to be distributed through probate. Probating real estate can be expensive and time-consuming (and it can lead to disputes among potential heirs), so in most cases, you will want to avoid it by using a non-probate transfer.
3. Business Succession Planning for Real Estate Developers and Investors
If you are a real estate developer or investor, along with building your estate plan you will also need to create a succession plan for your business. We recently discussed the importance of business succession planning, and that discussion applies equally to real estate-based enterprises as it does to other types of businesses.
Do you know who will take control of the business if you die or become incapacitated? Will he or she (or they) have the information and resources necessary to step into your shoes? Does your estate plan coordinate with your business succession plan (i.e., will the right people have control of your properties and your business)? These are the types of issues you will need to think through in order to make sure that your business and your loved ones are secure.
4. What If I Don’t Have an Estate Plan (or Business Succession Plan)?
If you do not have an estate plan, who gets what? If you don’t have a business succession plan, who will take the reins when you are gone? These are important questions, and they do not have easy answers. But, what we can tell you is this: You almost certainly don’t want to find out.
With the estate planning and business succession tools that are available, there is no reason to leave your properties’ or your business’s future to chance. By taking the time to plan ahead, you can rest assured that your high-value assets will remain in good hands.
Schedule an Initial Estate Planning Consultation with Attorney Jiah Kim
For more information about addressing your real estate holdings in your estate plan, contact Jiah Kim & Associates for an initial consultation. To speak with an attorney in confidence, call us at (646) 389-5065; or, you can feel free to schedule an appointment online at a time that works for you.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.