| Integrating real property and estate planning |
| Real estate provides certain challenges and opportunities in estate planning. |
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| Real estate located in other states may require "ancillary probate" proceedings in the other state if titled in the name of the decedent, rather than being held by an entity. |
Real estate titled in the name of the decedent may be subject to estate taxation in the other state. | |
| Rental or commercial real estate can be held by a family limited partnership or limited liability company. During your lifetime, the partnership or limited liability company helps provide protection against personal liability, and allows you to maintain control over the operations. There should be a valid business purpose for the use of an entity. Because of transaction costs, it is most appropriate for assets of significant value. |
| During your lifetime, you can gift shares of the limited partnership or company to your beneficiaries on a discounted basis (discounting for lack of control and lack of marketability). It is important for proper appraisals to be done to assure that the numbers are justified. It is also important to operate the business in accordance with the form of entity chosen, and not to treat the business as being owned outright by you once you have started transferring interests in the business. |
| Upon your death, remaining interests held by you will be taxable in your estate, but the interest transferred prior to your death will not be subject to taxation in your estate. (The catch: although the transferred and bequeathed interests pass free of estate tax, the beneficiaries receive the property at a lower tax basis. If the partnership or company is subsequently liquidated, the beneficiaries have a lower tax basis, and potentially greater capital gains tax to pay. Of course, the capital gains tax rate is not as high as the estate tax rate.) |
| Real estate, including your home or vacation home, may be an appropriate asset to hold in your revocable trust or other trust, although typically, the principal residence may not be transferred to a trust for simplicity's sake. |
| In limited circumstances, a "qualified personal residence trust" may be an appropriate planning technique to freeze the value of a personal residence and to transfer it during your lifetime. |