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Americans work hard throughout their lives to buy a home, a small part of the American Dream, but many don’t spend enough time planning to properly pass it on to their heirs, leading to disputes and even loss of wealth, experts said.
According to Federal Reserve data, the silent generation and baby boomers own about $25 trillion in real estate. This represents a large portion of the $105 trillion in total assets that researchers Cerulli Associates estimates will be transferred by 2048, but experts say it will be among the most difficult assets to transfer.
Estates can come with a lot of baggage and if they have to be disposed of before death there is a risk of families being torn apart and assets being lost, advisers said.
Jackie Garrod, Regional Wealth Manager at Northern Trust, said: “Home holds so many memories and parents want to pass that on to their children and continue to make memories there.” “It’s a big decision because it’s near and dear to the children’s hearts, but parents need to talk about it with their children. We want parents to think it through because their children may have concerns.”
What kind of problems may arise when inheriting real estate?
Some real estate issues, especially when bequeathing real estate to multiple children, include:
- Maintenance – Who will handle repairs, painting, and upgrades?
- Usage – Who can use the home and when?
- Structure – Who are the decision-makers, or how is the final decision made if there is disagreement?
- Expenses – How will maintenance, property taxes, insurance, electricity, gas, etc. be paid for?
- Exit Strategy – What if your child is not interested in the property, can’t afford to pay for it, lives far away and can’t use it, doesn’t want to pay for it, or wants to move out after a few years?
Without a clear blueprint, it can turn into an anxiety-filled nightmare for parents who want their children to continue creating and sharing good memories with their children, said Mark Persemer, chief wealth strategist and Florida regional director at wealth management firm Glenmede.
According to a survey of 2,000 Americans conducted in August by online legal consulting service LegalZoom, about 62% of older adults plan to leave real estate to their children, while 42% of younger Americans said they would not be financially prepared to keep and maintain real estate if they received it now. Property taxes and maintenance costs topped the list of concerns, at 20% each. Twelve percent of young Americans were concerned about existing debt related to real estate, and 11% were concerned about the legal complexities of owning real estate.
What should parents do with their property?
Experts say homeownership is an important way to build wealth, but the easiest thing for parents to do is to sell real estate and replace it with liquid assets like cash or brokerage accounts. Experts say they are easily valued, divisible and do not necessarily require ongoing maintenance, expense or contact with other heirs.
“But some people are stubborn,” Parthemer said.
Experts say that if you are determined to pass on your wealth, proper planning is essential, starting with discussions with your heirs.
“Parents should do some fact-finding and put together a user agreement that lets (heirs) know how to maintain or use it, how to pay for it, who will maintain it or take turns managing it and receive a salary,” Garrod said.
These intergenerational conversations are “the biggest advantage in ensuring continued success,” Palthemer said. “It’s about educating the next generation about what the plan is, how it’s structured, and why the shirt sleeves have remained the same for three generations.”
Parents can then consider various ways to pass on the estate, including using a trust, limited liability company (LLC), or both, experts say.. These can help families avoid probate, which can be time-consuming, expensive, public, and potentially difficult. They may also offer protection and tax benefits, experts say.
Why put your assets in an LLC?
LLCs offer liability protection, Garrod said. If someone falls on your property, your personal assets will be protected from lawsuits and the like.
Although an operating agreement is not required, experts recommend one that outlines the property’s management and accounting, compensation, usage, ownership, and how shares will be transferred if someone wants to leave. If the property produces income, the contract should also detail how it will be distributed.
Setting up an LLC as a trust can provide additional personal protection, similar to that in a divorce case, Garrod said. Ownership of an LLC is considered part of your estate and can be disputed, but a trust can remove ownership.
Why put property in a trust?
A trust, whether irrevocable or revocable, can protect property in the event of a lawsuit.
- Irrevocable trust: A trust rather than an individual owns the property. Relinquishing control of an estate means that nothing can be changed, but the estate is protected in litigation and may reduce inheritance taxes.
- Revocable trust: Real estate is not fully protected because individuals manage the estate and the real estate remains within the estate. However, when that person dies, there is no one who can change the trust, so the trust becomes irrevocable and the assets are protected for the benefit of his or her heirs.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
