It’s the lucky family that enjoy years or multiple generations in a home, whether it’s a vacation retreat or the parents or grandparent’s primary residence. Property like this is sometimes called “heirloom real estate.” Keeping this type of property in the family successfully, especially across generations, requires specific estate planning techniques.
Forbes’ recent article, “How To Transfer Heirloom Real Estate,” notes that, as the senior generation ages, heirloom real estate can be the place where many generations get together at least once a year, usually around a holiday. As families spread around the country or world, the family real estate can become the one tie or source of stability and continuity for the family.
To maximize the chances that the property will stay in the family and help keep the family together, you have to give the details some thought and work with your family members and an estate planning attorney. Most people think to leave the real estate in their wills to their children jointly, much as they do with the rest of their estate. However, that is usually not a wise strategy for heirloom real estate.
If the property is in a different state than where you reside, your estate will have to be probated in two states. The state where you reside will control the probate of most of your estate. However, the real estate is probated in the state where it is located. You can avoid that second probate by having the property owned through a trust, limited liability company (LLC), or other entity.
Maintenance and other routine expenses often become problems, because each sibling has to agree to pay a share of these expenses. Some expenses are mandatory, like real estate taxes, but other expenses can be discretionary.
Typically, at least one sibling will want to sell the property, while others don’t. In some instances, when the other siblings don’t want to sell but aren’t able to buy the other sibling’s share, one of the siblings will try to sell her share to an unrelated person. Joint ownership also creates issues, when one of the owners divorces or passes away, because the death of a co-owner raises the issues of whether that owner’s share goes to the surviving co-owners or the heirs of the deceased.
A limited liability company (LLC) may be the best choice. It provides the liability shield of a corporation with the operating and tax flexibility of a partnership. If you chose an LLC or other entity as the best option, the parents who currently own the property should create the entity right away: they’ll be the original owners of the LLC and set up its operating rules. They then can give or sell ownership interests to the children, or they can hold the LLC for life and leave its ownership to the children through their estates. The parents set up rules for sharing and maintaining the property that can be implemented on a trial basis, while the parents are alive. Changes can be made as needed.
An important feature of the LLC is that it can keep the property from being sold outside of the family. The LLC bylaws can prohibit any owner from selling her shares to someone not in the family. The bylaws can also create a process for one member, or other owners, to sell to the LLC and provide a formula for determining the price and payment terms.
The LLC won’t resolve all of the cash flow and money issues. The co-owners must still be willing and able to finance continuing ownership of the property. One way to address money problems is for the parents to leave a cash fund or a life insurance policy to the LLC that will cover some or all of the ownership costs for a period of time. It might also provide a way for the other owners to buy out the interest of anyone who wants to sell.
This can also be a great tax planning tool, when an estate is possibly subject to federal, state, or inheritance taxes. Giving shares of the LLC and establishing minority ownership interests can decrease the value of the property for tax purposes.
The next generation is often not mature enough to understand the emotional value of an heirloom property, so you may want to start this process early, by talking about the family’s traditions and why the house is important to maintain as part of the family’s legacy. Then, include as many generations as you can in your meetings with your estate planning attorney, who will help you dovetail the transfer of the heirloom property with the overall goals of your estate plan.
Reference: Forbes (August 19, 2018) “How To Transfer Heirloom Real Estate”