Real Estate Guidance Through the Wealth Transfer Process

Selling real estate as part of wealth planning can be a complex and challenging process. Proper estate planning, asset protection strategies, and considerations when selling property are essential for ensuring that your real estate assets transition smoothly to your heirs. This blog provides comprehensive guidance for real estate owners to navigate the wealth transfer process, minimize taxes, and protect their assets.

Disclaimer: The content in this article and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

If you have questions about selling real estate through the estate plan process, we are here to help!

1. Estate Planning for Real Estate Owners

Why Estate Planning Is Important

Estate planning ensures that your property and assets are distributed according to your wishes after your death. For real estate owners, this includes your primary home, land, rental units, and commercial properties. Without a solid estate plan, your property could be subject to probate, which is time-consuming, costly, and potentially contentious.

Proper estate planning not only guarantees that your heirs receive the intended assets but can also prevent disputes, minimize taxes, and streamline the transfer process. Real estate owners need to think about how their property will be managed, who will inherit it, and what the tax implications will be for their heirs.

Did you inherit real estate and need to discuss your options? Contact us today to get expert advice.

Key Considerations for Real Estate

When creating an estate plan for real estate, consider the following:

Property Management: Who will be responsible for managing the property until it is sold or passed on? This is particularly important for rental and commercial properties.
Inheritance: Will one heir receive the property, or will it be divided among multiple beneficiaries? If the property is to be shared, how will it be managed or sold? Clearly defining these terms can prevent family disputes.
Tax Implications: Heirs may face estate or inheritance taxes. Proper planning can help reduce these liabilities, making the process smoother and less burdensome for your loved ones.

If you need professional advice for Estate Planning – We recommend Rainey, Kizer, Reviere & Bell

2. Asset Protection for Real Estate Owners

Why Asset Protection Matters

Asset protection is an essential consideration for real estate owners. It shields your property from potential claims, lawsuits, or creditors. This is especially important if you own rental or commercial properties, as liabilities could arise from tenant accidents or incidents on your property.

By implementing effective asset protection strategies, you can protect your real estate holdings from creditors and legal claims while ensuring your personal and family assets remain safe.

Strategies for Asset Protection

Title Ownership: Consider how your property is titled. Different ownership structures offer varying levels of protection:
- Joint Tenancy with Right of Survivorship: This allows for seamless transfer to the surviving co-owner, avoiding probate and offering some protection against claims.
- Tenancy by the Entirety: Available to married couples in some states, this form of ownership protects the property from creditors of one spouse and avoids probate upon death.
Limited Liability Company (LLC): Holding investment properties in an LLC can separate your personal assets from business liabilities. If a tenant sues or a claim arises from property-related issues, your personal assets (home, savings, etc.) remain protected.
Umbrella Insurance: In addition to standard home or property insurance, an umbrella insurance policy can provide extra liability coverage. This additional layer of protection is vital if you own multiple properties or rental units.

Picture shown from: Peninsula Wealth

3. Things to Consider When Selling Real Estate

Estate and Inheritance Taxes

When selling real estate as part of an estate, you must consider the potential impact of estate and inheritance taxes. In 2023, the federal estate tax applies to estates that exceed $12.92 million. If your estate, including real estate, exceeds this threshold, careful planning is required to reduce tax liability for your heirs.

Tax-Reduction Strategies:

Gifting: You can gradually gift parts of your property to heirs over time, thereby reducing the overall size of your estate and minimizing the estate tax burden. The annual gift tax exclusion allows you to gift up to $17,000 per recipient in 2023 without triggering gift taxes.
Trusts: Placing real estate into a trust can help avoid estate taxes and offer other tax benefits. Trusts can also protect your property’s appreciation from immediate taxation, which can benefit your heirs when selling the property.

Capital Gains Tax

If your heirs decide to sell the property after inheriting it, they may be subject to capital gains tax. However, the stepped-up basis rule helps alleviate this tax burden. The property’s value is adjusted to its fair market value at the time of your death, which means heirs only owe taxes on the difference between this updated value and the sale price.

Tax-Advantaged Ownership Structures:

Family Limited Partnership (FLP): An FLP allows you to transfer partial ownership of the property to family members while maintaining control. It can offer both tax and asset protection benefits, making it a popular choice for estate planning.
Grantor Retained Annuity Trust (GRAT): A GRAT enables you to transfer appreciating property to heirs while avoiding estate taxes on the property’s appreciation.

Tax Filing

The executor of the estate is responsible for filing the deceased’s final tax return and any estate taxes, including capital gains taxes if the property is sold. Ensuring all taxes are properly filed and settled can prevent delays and complications for your heirs.

If you have tax questions or would like to meet with a tax strategist – We recommend Alexander Thompson and Arnold

Clear Title

Before selling inherited property, ensure that the title is clear and free of any encumbrances or liens. Unresolved title issues can delay the sale or reduce the property’s value.

Our team specializes in selling real estate through the inheritance and wealth transfer process. Learn more about our team here!

Picture shown from: Davis, Agnor, Rapaport & Skalny

4. Appraisal

When selling real estate as part of an estate, appraisals play a key role in determining the value of the property.

Historical Appraisal

A time-of-death appraisal establishes the property’s value at the time the original owner passed away. This appraisal is essential for tax purposes, especially when determining capital gains if the property is sold.

Fair Market Value

It’s recommended to obtain an updated appraisal before listing the home. Market conditions may have changed since the date of death, and a current appraisal ensures that the property is priced competitively.

Need help deciding on what type of appraisal is best? We can help with that!

5. Avoiding Probate

What Is Probate?

Probate is the legal process by which a deceased person’s estate is settled and their assets distributed. For real estate, this can involve court proceedings, which are often time-consuming, costly, and public. Many real estate owners aim to avoid probate to ensure a quicker, more private transfer of assets to their heirs.

Ways to Avoid Probate for Real Estate

Living Trusts: Placing real estate into a living trust allows you to maintain control over the property during your lifetime while ensuring a smooth transfer to beneficiaries without going through probate. A revocable living trust can be amended or revoked at any time, providing flexibility during your life.
Joint Ownership: Properties held in joint tenancy with right of survivorship or tenancy by the entirety automatically transfer to the surviving co-owner upon death. This structure bypasses probate, ensuring immediate transfer.
Transfer on Death (TOD) Deeds: In some states, a TOD deed allows property owners to name a beneficiary who will inherit the property upon their death, without probate.
Payable-on-Death (POD) Accounts: If you have rental or income-generating properties, setting up POD accounts for rental income ensures that income distributions will transfer directly to beneficiaries upon your death.

Picture shown from: Ozarks Legacy Law

6. Other Considerations

Choose Your Executors and Trustees

Choosing the right executor and trustee is vital to ensuring your estate is handled properly after your death. These individuals will be responsible for managing your estate, handling probate (if necessary), and ensuring your heirs receive their inheritance.

Executor: The executor is responsible for carrying out the instructions outlined in your will. This role may involve dealing with probate, selling property, and filing final tax returns.
Trustee: If you have set up a trust, the trustee will manage the assets within the trust according to your instructions. Trustees are especially important for real estate held in trusts.

Use Wills and Trusts

Wills and trusts are the primary legal tools for transferring real estate. A will outlines who will receive your assets, but may require probate. A trust can offer greater control, tax benefits, and allow you to bypass probate.

Revocable Living Trust: This trust allows you to retain control of your real estate during your lifetime while ensuring that the property transfers smoothly after your death.
Irrevocable Trust: Provides stronger asset protection and tax benefits but requires you to relinquish control over the assets placed in the trust.

Update Your Plan as Your Life Changes

Life events—such as marriages, divorces, births, or deaths—can significantly impact your estate plan. Regularly reviewing and updating your plan ensures that it reflects your current wishes and is aligned with tax law changes.

Getting Real