Real Estate and Estate Planning – How Do They Work Together?

Property ownership, transactions, and estate planning can overlap in many ways, such as asset protection and tax consequences. The creation of an estate plan that works seamlessly with your real estate interests can save your heirs time, money, and frustration should you become incapacitated and unable to make decisions or at the time of your death.

Real estate is a great vehicle to reduce estate tax through appraisals and depreciation inside entities such as a Family Limited Liability Company (Family LLC) or Grantor Trust. There are several types of trusts, each with various benefits. Real estate owners have advantages concerning estate planning by placing their assets within these entities. Proper planning will permit owners to make gifts of their interest in the entities while taking advantage of discounts for “lack of marketability” or “lack of control,” typically yielding a discount range of 30 to 40 percent. Finding a qualified estate planning attorney can identify which type of entity, LLC or Trust, will work best in your unique situation. State laws vary and if your property is in multiple states, find an attorney in the state where you live.

COVID-19 and its ensuing negative impact on the commercial real estate market currently position these real estate owners a timely opportunity to make gifts of real estate because of devaluation. Apartment building owners face declining revenue because of federal tenant eviction protection. Owners of hotels are losing revenue due to shelter in-home orders, travel reduction, and social distance requirements forcing them to operate well below capacity. Shopping center owners are also seeing declining revenues due to government mandate closures, insolvent tenancy, and general reduction of public spending in these environments. For these reasons and more, real estate property valuations are at the low end of the scale, and appraisers are providing “COVID-19 discounts” in the range of 15 to 30 percent for real property.

The crossover between real estate and estate planning includes but is not limited to:

• Survivorship rights/Ownership in joint tenancy – Probably the most common form of estate planning, minus no planning, may not match your legacy planning intentions and goals, and it may cause problems. Careful consideration is necessary to determine if this one person should retain complete ownership after death.
• Tenants in common – This avenue of ownership may make it easier to complete a charitable trust, like-kind exchange, or any joint estate planning.
• Some states permit “homestead” – Homestead rules provide tax benefits and creditor protection. However, re-titling of assets out of an individual name can result in the homestead tax exemption or the Save Our Homes (property tax) protection, as well as weaken creditor protection.
• Asset protection – Suitable entity and asset ownership planning is a tool to protect your assets from inside creditors (property and business-related) as well as outside creditors (from personal activities or other business).
• Capital gain planning and appreciated property – On appreciated property, like-kind exchanges and various trust types can delay or defer capital gains taxes. However, death may shelter it fully through a property step up in the basis of property value.
• Real estate and IRAs – Within specific guidelines, you may hold title to real estate in your IRA. It requires a cooperative custodian holding the actual title and maybe appropriate investment diversification and tax strategy.
• Medicaid – Long-term care costs are sky high, and with proper advanced planning, it is possible to qualify for Medicaid benefits to offset the cost. In some areas, homestead real property is sometimes an exempt asset for Medicaid eligibility purposes. These standards and regulations periodically change, so a careful review of strategy is a must.
• Bankruptcy – Bankruptcy does not mean you have to lose all of your property if you use exemptions that protect it. Exempt assets receive protection from creditors. Filing bankruptcy depends on the exemptions permissible in the state where you live. Many states allow a choice between a state and federal exemption system.

Understanding the options available to your estate plan through your real estate ownership can create solid wealth preservation. Find out how maximizing real estate property structure and benefits can improve your estate planning. Please contact us at our Forty Fort Pennsylvania office or give us a call at 570-288-1800.