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Americans work hard their whole lives to buy a home – a small piece of the American dream – but many don’t spend enough time planning to pass it on properly to their heirs, resulting in disputes and even lost property, experts said.
The silent generation and baby boomers own about $25 trillion in real estate, according to Federal Reserve data. That’s a big chunk of the $105 trillion in total assets researcher Cerulli Associates estimates will get passed down by 2048, but among the hardest assets to hand off, experts said.
Real estate can come with a lot of baggage that should be hammered out before death, or there’s a risk of it ripping apart families or the property being lost, advisers said.
“Homes have so many memories, and parents want to pass them on to children and want them to continue to make memories there,” said Jackie Garrod a regional wealth manager at Northern Trust. “It’s near and dear to their hearts so it’s a big decision, but parents need to have a conversation with their kids. There may be concerns by kids that parents want to think through.”
What issues can arise when passing on real estate?
Some issues with real estate, especially if more than one child is bequeathed the property, include:
- Maintenance – Who will take care of repairs, painting and upgrades?
- Usage – Who gets to use the home and when?
- Structure – Who is the decision maker or how are final decisions made if there’s a disagreement?
- Expenses – How does everything – maintenance, property taxes, insurance, electric and gas bills – get paid for?
- Exit strategy – What if a child isn’t interested in the property, can’t afford the costs, lives too far away to use it and doesn’t want to pay for it or wants out after a few years?
Without a clear blueprint, the home parents want their children to continue making good memories in and share with their own kids could turn into a nightmare filled with angst, said Mark Parthemer, chief wealth strategist and Florida regional director at wealth management firm Glenmede.
About 62% of older adults plan to leave their children real estate, but 42% of younger Americans said they wouldn’t feel financially prepared to keep and maintain it if they received it today, according to a survey of 2,000 Americans in August by online legal advice provider LegalZoom. Property taxes and maintenance costs topped the list of concerns, each at 20%. Existing debt tied to the property concerned 12% of young Americans, and 11% worried about the legal complexities of owning real estate.
What should parents do with their property?
While homeownership has been a key way to build wealth, the easiest thing for parents to do is skip the property and instead, pass on liquid assets, like cash or brokerage accounts, experts said. They’re easily valued, divisible and don’t necessarily require ongoing maintenance, expenses, or contact with other heirs, experts said.
“But some (people) are stubborn,” Parthemer said.
If you’re determined to pass on property, proper planning that begins with a conversation with your heirs is essential, experts said.
“Parents need to do fact-finding to put together a user agreement that allows (heirs) to know how to maintain or use it, how expenses will be paid, who does upkeep or if they will rotate managing it and get a salary,” Garrod said.
Those intergenerational conversations are “the biggest benefit…to ensure continued success,” Parthemer said. “Educating the next generation on what the plan is, how it’s structured and why prevents shirtsleeves to shirtsleeves in three generations.”
After that, parents can weigh different ways to pass on real estate, including using a trust or limited liability company (LLC) or both, experts said. Each helps families avoid probate, which can be time-consuming, costly and public, potentially inviting challenges. They can also provide protection and tax advantages, experts said.
Why put property into an LLC?
An LLC provides liability protection, Garrod said. If someone falls on the property, personal assets are protected from a lawsuit, for example.
An operating agreement isn’t required, but experts recommend one spelling property management and accounting, compensation, usage, owners and how shares may change hands if someone wants out. If the property generates income, the agreement should also detail how it will be distributed.
Putting an LLC into a trust can provide additional personal protection, like in a divorce, Garrod said. Ownership in an LLC may be considered part of your estate and up for grabs in a dispute, but a trust could remove it.
Why put property in a trust?
Trusts, irrevocable and revocable, can protect property in a lawsuit.
- Irrevocable trust: The trust, instead of an individual, owns the property. You give up control of the property and can’t make any changes, the property’s protected in lawsuits and can potentially lower estate taxes.
- Revocable trust: An individual keeps control of the property, and it stays in the estate, so the property isn’t fully protected. However, once the person passes, the trust becomes irrevocable since there’s no longer anyone who can change it, and the property’s protected for heirs.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.