When making your estate plan regarding real property that you own, there are some unique items to think about.
First, consider whether or not you might need Medicaid at some point. If you do not have long term care insurance, and your net worth is less than $1 million, the answer is – possibly – yes.
If your home is paid off, you can take steps now to make sure the state will not be able to get your house when it seeks estate recovery, by filing a lien against your house.
How? You can keep the full legal right to use and enjoy your home during your life or joint lives (for husbands and wives) and at the same time give away the rest to your children or to trusts for your children. If this is done sufficiently in advance (at least five years), then the state will not be able to recover your home and the home will not be lost to estate recovery if you ever qualify for Medicaid.
Second, it must be determined “how” real estate is owned. This is important because the manner of ownership dictates who it passes to, and whether it goes through probate or not.
A perfectly good plan can be derailed if real estate is not owned properly. For example, assume Jack’s will says all his assets are to be given to his children, Florence and Liz, in equal shares; and the real estate Jack owns is owned by Jack and Liz as “joint tenants with the right of survivorship.” Florence is not on the title.
When Jack dies, who gets his real estate?
The answer is Liz. Florence was disinherited as to the real estate – by mistake. It avoided probate, but a child was disinherited.
It would have been better to put the home in a revocable trust, and direct trust assets to the two children in equal shares on Jack’s passing. Also, if Liz were sued, her ownership in the house could be taken. That would not be good either.
Third, it must be determined what the real estate’s value might be (now and in the future), what it cost, and whether there will be unnecessary administrative burden if it is kept in one person’s individual name.
For purposes of the federal estate tax, the value of real estate is important for determining who, within a couple, should own the real estate. Transfers can be made between U.S. citizen spouses (or their trusts) with no adverse tax consequences with deeds. Certain steps need to be taken to insure homestead exemption is not lost and special assessments are not lost.
The cost of real estate is important for determining how best to utilize the current law which steps up basis of assets to date of death value. If Mom and Dad paid $200,000 for a house and it was worth $500,000 when the survivor died, then the kids get the house with an income tax basis of $500,000.
This translates into little or no capital gains tax being due when the kids sell the house.
Also, if one owns real estate (even a timeshare) in another state, one should consider creating a revocable trust that will own that real estate so it avoids probate proceedings, and the related costs and delay, with another lawyer in another state.
As always, a little bit of advance planning can avoid many problems.
Mark F. Winn, J.D., Master of Laws (LL.M.) in estate planning, is a local asset protection, estate and elder law planning attorney. mwinnesq.com