Passing on Real Estate: A Guide to Avoiding Family Strife

In 2022, nearly seven out of 10 respondents in an Ameriprise survey planned to leave real estate to their heirs. However, more than half of them had not informed their heirs about their plans.

The Importance of Planning

Passing on real estate without proper planning can lead to sibling strife, even among wealthy heirs. Disputes may arise over who gets to use the Hamptons house for the Fourth of July or how to handle renovations on the Aspen chalet.

To avoid conflicts, it is crucial for parents to recognize that the family home or vacation home is more than just a financial asset. It carries deep personal significance.

Trusts and Operating Agreements

Parents can maintain control over how the property will be managed after their death in several ways:

• Trusts: Parents can gift the home using a trust that includes enough cash to maintain it. This can save on taxes if done before death.
• Operating agreements: These agreements allocate holidays to each sibling and control whether the home can be used for family weddings. They can also specify which property damage the trust will cover if a family member is responsible.

Equitable Distribution

Parents often assume their adult children will share the property equally, but it is important to discuss preferences and assess capabilities:

• Do all heirs have equal attachment to the home and use it with the same regularity?
• Can they share the expenses of the home equitably?

If there are significant income disparities among the heirs, parents can put funds in the trusts to cover their costs. Alternatively, a buyout provision in the operating agreement can dictate how siblings can acquire a third party’s stake.

Decision-Making

While it is important to allow the heirs some control, it is also essential to have a decision-maker in case of a stalemate. The trustee can make final calls on issues such as repairs, renovations, or even whether to sell the property.

Letters of Wishes

Some parents prefer to give their children more power. Rather than using operating agreements, they can write a “letter of wishes.” This document is not legally binding but indicates how the parents would like the property to be used.

Estate Planning Considerations

This is an opportune time to transfer homes and other assets. Currently, married couples can give away $27.22 million in assets without incurring the 40% federal estate tax. This exemption will be cut in half at the end of 2025 unless Congress extends the Trump-era tax cuts.

Conclusion

Passing on real estate requires careful planning to prevent conflicts among heirs. By using trusts, operating agreements, and thoughtful consideration of equitable distribution and decision-making, parents can ensure that their legacy is passed on smoothly and without strife.