Difficult Assets, Part 1: Real Estate

Post by Sandy Swartzberg

If you have been reading my blog, “Conversations with Sam,” you will know that my grandfather, Samuel Poses, was a very prominent attorney. As he became older, his practice (which had a large litigation portion) turned exclusively to business and estate planning.

When I was in law school, we talked every Sunday. Many of the talks revolved around estate planning issues. He said over and over again that real estate and the family businesses were the most important and difficult assets to plan for in an estate plan. In my thirty-five years of practice, I have found this to be true. Clients who have these assets should plan very carefully, not only for their transfer, but how they are going to be handled when they become less able.

In this blog post, I will talk about real estate. In the next blog post, I will talk about businesses. There are four main challenges with real estate as follows in no particular order:

1.         If real estate is owned by the decedent at the time of his or her death and it is not in the state in which they are domiciled and a probate is required, you will need to have an ancillary probate in each state in which the decedent owned real estate. These probates can be very expensive and time consuming.

The solution is to hold the real estate in such a manner that it does not require a probate. There are several devices for avoiding probate. The first is to hold the real estate in a living trust. A living trust does not end with the decedent. Real property held in a living trust can be transferred by the trustee or continue to be held depending on the directions in the living trust.

2.         Many states now have devices that allow you to record in the chain of title a beneficiary designation so that the real estate passes automatically outside of probate. Wisconsin has a brand new trust, a Transfer on Death.

There is also the possibility of using an old form of title which is through adding a joint tenant to the real estate and, therefore, upon the decedent’s death, the living joint tenants succeeds to the real estate in its entirety. This device, while effective, has many drawbacks including the fact that once you add someone to the title, you cannot take them off. Contrast that with the living trust where until you die or become incompetent, you can change who is getting the real property as many times as you wish. The only thing you need to ensure is that the property is deeded to the trust.

3.         Trust companies and trustees in general do not like to hold real estate. Many people have a sizeable portion of their wealth tied up in real estate. They often want to leave their property in trust for their children, grandchildren, etc.

Trust companies or even individual trustees do not like to hold and manage real estate. Many of them are not set up for the complications of holding and managing real estate. Often, if they have real estate in a portfolio that they received from the decedent at the time of the decedent’s death, they sell off the real estate often at very low prices, diminishing the estate.

One solution to this problem is to name a separate trustee who is skilled in the management of real estate and who may have the ability to continue to hold and manage the real estate or at least liquidated in an orderly fashion at a reasonable price. Another solution is to hire a professional management company prior to death. This needs to be done very carefully since many management companies charge exorbitant fees and will run the real estate into the ground.

Another solution is to make sure that the real estate is willed to those heirs who are able to take care of it and give the other heirs or trusts more liquid assets which they can hold or manage more easily.

Another problem with real estate is even if the decedent wants an orderly liquidation after his or her death; the decedent may have a much better idea of the value of the real estate than any of the participants who will be liquidating real estate. Even with all of the things I have said before as a possible solution especially with property, properties in marginal areas pose special risks and therefore require special precautions.

The best way to handle this is for the owner of the real estate to begin to liquidate some of the real estate or all of the real estate before death. This strategy maximizes value.

4.         Another problem with real estate is that real estate may come with substantial liabilities and may be detrimental to an estate. The type of liabilities can be unpaid mortgages, unpaid property taxes, tenant claims and, worst of all, environmental claims.

If the decedent holds the real estate individually, his heirs receive the property; they will receive it with all of its liabilities, such as taxes and environmental issues. This problem is easily avoided by pointing the real estate into one or more LLCs. Also, the will or trust should provide that the beneficiary may disclaim their interest in the real estate.

If you fail to take these steps, an individual may inherit real estate which has property taxes owed which continue to grow on the property and in many places, the city, state or municipality may sue the individual who inherits the property for these back real estate taxes. Even worse, if the property has environmental problems the individual may be personally liable.

If the property is held in an LLC, only the LLC will liable and liability will not tax the individual. It is however better to have a good disclaimer provision in the will or trust.

Obviously, these are only a few solutions for a number of hypotheticals and individual situations require specific planning. There are no shortcuts.  Have a plan – a carefully considered plan is the best way to protect your assets and help your heirs. Stay tuned for my next post: Difficult Assets, Part 2 – Small Businesses

The comments and opinions expressed in this blog are intended for informational purposes only and do not constitute legal advice. Reading or using the information in this blog does not create the existence of an attorney-client privilege. Due to the changing nature of the law, the blog posts may contain dated material. For an update on the current law and the application of the law to your particular facts and circumstances, consult a legal advisor. The information contained herein is not a substitute for obtaining legal advice from a qualified attorney licensed in your state.