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Questions on Estate Planning with Real Estate

People who own real estate do their heirs a big favor by getting their estate planning in order. Having clear intentions laid out in a legal document helps to avoid disputes, and, if a living trust is used, makes transferring real estate following a death inexpensive, private, and easy (because probate is avoided).

Here are a few common questions my clients and their families often ask when discussing the concept of estate planning for the family home and other properties (rentals, vacation homes, etc).

Will There be Taxes on the Inherited Real Estate?

The number one question on most people’s minds when they inherit real estate is whether they will have to pay taxes on it. For the most part, people don’t have to pay taxes on what they inherit, unless they live in a state with an inheritance tax (California does not). There are tax forms to be filed, says the Petoskey News-Review in the article “The pros and cons of inheriting real estate,” but not every estate has to pay taxes.

The heirs have to pay taxes on any gains after the death of the decedent if and when they sell the property. The seller will have either capital gains or capital losses, depending upon the sales price of the property and it’s cost basis. Let’s discuss cost basis for a moment, because it’s the main reason that inheriting real estate is often so much better than when a person gives it away during their lifetime. Here’s why: Heirs receive a step-up in cost basis of most inherited property when someone dies. That means that, instead of paying tax on the difference between the sales price and its original purchase cost, you only pay tax on the difference between the sales price and the value of the property on the date of death of the person you inherited it from.

Here’s an example: Let’s say that Mom purchased a house for $100,000, and wrote up a living trust that gave it to her children when she died (at which time the value of the property had appreciated to $300,000). Later, the children inherit the house, and sell it for $320,000. The children only have to pay capital gains on the $20,000 (the difference between the sales price and the value of the property at Mom’s date of death).

For property that has appreciated significantly, the step-up in basis concept described above can be a huge benefit for the heirs. They avoid significant capital gains tax they would otherwise have to pay.

In order to determine the date of death value of property, estate planning attorneys recommend that people who inherit property have it appraised by an experienced real estate appraiser so they can have that information ready for any future sale.

Then, there is the subject of property taxes. That one is a bit beyond the scope of this article and deserves its own discussion. I recommend checking out this article to learn about how to pass along your property tax base to your heirs to keep their taxes as low as possible.

What if the Heirs Don’t Want to Sell Property they Inherit?

One of the biggest disagreements that families face after the death of a loved one centers on selling real estate property. Some families create irreparable harm in the course of these disagreements, which is a shame. It would be far better for the family to anticipate and talk about the property before the parents die, and then work out a plan. Good estate planning attorneys can then reflect that plan in a person’s will or trust.

Common sticking points arise when a vacation is passed down to multiple heirs. One wants to sell it, another wants to rent it out for summers and use it during winters and the third wants to move in. If they can resolve these issues with their parents, it’s less likely to come up as a divisive factor when the parents die (when emotions are running high). This gives the parents and heirs a chance to talk about what they want, and why.

What Happens to All the Possessions in the Home?

Conflicts can also arise when it’s time to clean up the house after someone inherits the property. Mom’s old lemon juicer or Dad’s favorite barbecue fork seem like small items, until they become part of family history.

The best thing for families is to address the personal property in the estate planning process. We provide our clients with a document they can fill out with their families over time, as they determine which items heirs will want or which items they may want to be sure go to certain beneficiaries.That document then becomes automatically incorporated into their will or trust because we draft the will or trust accordingly.

An good estate planning attorney can help the family work through all of these issues, and much more.

Reference: Petoskey News-Review (June 25, 2019) “The pros and cons of inheriting real estate”


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