Is value the key issue?
If you own residential real estate, especially if possessed for many years and possibly with multiple properties, you likely have major estate planning steps to address.
Residential real estate consists of single-family houses, some multi-family houses, townhomes, condominiums, and land parcels zoned for residential use.
In this article, we'll evaluate some of the key considerations that trustors encounter in estate planning for residential properties. Let's dive into those factors:
Who Should Get It?
Besides any issues of fairness/equitable distribution (see our June 2022 issue), bequeathing residential real estate brings a number of concerns, including:
- In considering your overall portfolio, who should receive the real estate component(s)?
- Does the beneficiary really even want it? Or does he/she have very little interest or competency in property management (or even hiring a firm to do it)?
- Who will live at the property? Family? Renters?
- Expertise in property management - does the beneficiary have the business sense?
How Might It Be Used?
While this may be an additional layer of complexity that you may hesitate to delve into, if you are looking at fair/equitable distribution then usage should be evaluated. Will the beneficiary:
- Reside at the property (beneficiary or related family members)?
- Rent to third parties (tenants), in order to generate income (i.e., income property)?
- Sell it (to generate cash and/or invest in another asset)?
- Hold as investment (especially raw land)?
- Use it occasionally by family members (e.g., vacation home)?
Income potential is another key factor and is particularly relevant considering the possible use of properties. Consider if you have three properties to pass-on: a family vacation home (negligible or no income); an income-generating duplex; and the "family home" that is getting passed on to a child who was taking care of the parents while living with them, and is destined to inherit the home as a residence. Add to this another layer of complexity if there are different levels of debt on each property.
Fortunately, financial professionals can help in calculating reasonable cash flow potential for given properties, which is especially valuable when comparative analysis needs to be done between multiple property options. Also, in certain tax situations, a property that generates negative cash flow on a tax basis can actually help to offset taxation on income-generating properties in a portfolio, so this can actually be valuable to some beneficiaries.
Maintenance, Ongoing Management
You might find that ongoing maintenance of a property is an issue in your estate situation. For example, your vacation home in the mountains (which requires year-round maintenance) is near to only one child, while your other children live several time zones away. Or your portfolio of single-family rental homes is spread across several states (with different tax laws, local ordinances, and property managers). Real estate requires maintenance in order to simply maintain value.
Before reading this article, you might have thought that value was the main issue when assessing who should get which property. However, after building upon the above considerations (who gets it, possible use, cash flow, and maintenance), value is still important but just one of many factors. As to valuation, this is a field in which you may want to rely upon a team of advisors - real estate appraisers, tax professionals and attorneys - in order to develop a plan that covers possible estate taxation as well as providing the information needed to meet your distribution goals.
In future articles, we'll discuss Commercial Real Estate, as well as an overall analysis of title, financing, risk, taxation, and transition strategies for real estate.
Experts in Estate Planning for Real Estate
At Mortensen & Reinheimer, PC we've crafted estate plans that have involved literally thousands of real estate properties! Let us put that experience to work for you in simplifying what can be a very complex process. We look forward to helping you! Please contact us at (714) 384-6053 to make an appointment, or use our online contact form. Our website is http://www.ocestateplanning.net.
About the author:
Tamsen R. Reinheimer, Attorney, is a Certified Specialist in Estate Planning, Trust & Probate Law (The State Bar of California Board of Legal Specialization). She has significant experience in all aspects of estate planning, trust administration, and probate. Contact Tamsen at firstname.lastname@example.org.