An estate plan can include all kinds of things. Some assets, such as funds in checking accounts, saving accounts, and mutual funds, are very common. But another common asset is real estate. So how do you go about Estate planning for real estate assets?
If you have real property as part of your estate plan, make sure you avoid these common mistakes we see with our clients.
Mistake #1: The Wrong Title
The first mistake we see is tied to the deed of the property. Some people like to add their child to the deed, making them a co-owner of the property. While there are certainly upsides to doing this, there are also downsides.
The first problem is that your child now owns the property, meaning creditors can come after it. So if your child gets divorced, their ex-spouse may come after the house. Or suppose your child finds themself in a position where they have a lot of debt. Then, they may come after the house if they need help to repay their bank, credit card company, or whoever else they owe money to.
The second problem is related to capital gains. If the child did not own the property, when the parent passes away, the child benefits from a “step-up” in cost basis regarding the home’s value. But if your child is already on the deed and a co-owner of the house, they miss this opportunity.
Mistake #2: Not Using an LLC for Rental Properties
This applies both to the estate planning world and the business planning world. If you have a rental property, we encourage our clients to consider having it owned by an LLC, not your own personal name.
From an estate planning perspective, the LLC can keep living on even after you pass. It’s easy to transfer ownership of the LLC, so that is not a concern.
From a liability perspective, the benefit to an LLC is that your personal assets are protected in case of loss. If a renter gets hurt on the rental property, they can only sue the LLC for the assets owned by the LLC – they can’t come after your personal assets. If the property was in your name, they could come after your personal property.
Mistake #3: Trust Issues
Setting up trusts is an essential part of estate planning. Whether you have a complex estate plan or a simple one, setting up a trust or two can help ensure your assets and carried out to your wishes. Yes, there are other critical documents, such as your will and power of attorney. Still, we encourage our clients to consider trusts as well.
A few different types of trusts may make sense for real estate. For example, sometimes a revocable trust – also called a “living trust” – makes sense. The good thing about a living trust is that you can (usually) change them if you so choose.
But sometimes, you may want to use an irrevocable trust with real estate. Of course, these can’t be changed once they’re set up, but they do have benefits vs. living trusts. It just depends on your situation, which is why we always recommend actually sitting down with an estate planning attorney and discussing your options.
Your real estate makes up a large part of your estate. To ensure your beneficiaries get the most out of it when you pass, we recommend including it as part of your estate plan.
But don’t go this path alone! Send us an email at https://hunsbergerlaw.com/contact/ or call at 714-663-8000 and we’ll help you through the whole process.