For many people, real estate represents the single largest purchase they ever make and, therefore, becomes their most valuable asset. Others invest further in real estate by purchasing a vacation home, rental property, commercial real estate, agricultural land, or multiple investment properties. Whether you own a modest single-family home or a complex investment portfolio made up of real estate, those assets deserve special attention when you create or update your estate plan. Unlike financial accounts that can be transferred easily through beneficiary designations, real estate presents unique legal, financial, and tax considerations that can complicate the administration of your estate. Moreover, as property values continue to increase in California, the consequences of inadequate estate planning become even more significant. With that in mind, the Los Angeles at Schomer Estate & Wealth Advisors discuss estate planning for real estate owners in California.
Why Real Estate Requires Special Estate Planning
Many people assume that all you need is a simple Last Will and Testament to effectuate the legal transfer of real estate after your death. While a Will does allow you to specify who should inherit your property, it does not avoid probate, and it is not always the best way to transfer real estate. In California, probate can be lengthy, expensive, and public, making it an undesirable outcome for many property owners.
Moreover, real estate frequently creates additional challenges during the administration of your estate because it must often be maintained until it is legally transferred to the intended beneficiary. Mortgage payments, property taxes, insurance premiums, utilities, repairs, and tenant issues do not stop simply because the owner has passed away. Without a clear estate plan, surviving family members may struggle to determine who is responsible for the maintenance and who has the authority to make decisions regarding the property.
Real estate can also create disagreements among beneficiaries if one beneficiary wants to sell the family home while another hopes to keep it. Siblings may disagree about the property’s value, maintenance responsibilities, or how rental income should be distributed. Fortunately, a well-thought-out and comprehensive estate plan can anticipate these issues and establish clear instructions for how to transfer real estate and how to handle disputes if they arise.
Evaluate Every Property You Own
A comprehensive estate plan should begin with a complete inventory of your real estate holdings, including your primary residence, vacation homes, rental properties, commercial buildings, undeveloped land, mineral interests, and any ownership interests held through partnerships or limited liability companies. You should also review how each property is titled because the legal manner in which property is titled often determines how it transfers after your death and whether probate will be required.
A Revocable Living Trust Can Help Avoid Probate
Although a Last Will and Testament remains the cornerstone of most estate plans, people often choose to use a revocable living trust as the primary method of distribution in a comprehensive estate plan. When you establish a revocable living trust and properly transfer ownership of your real estate into the trust, the trust becomes the legal owner of the property. During your lifetime, you typically continue serving as Trustee, allowing you to buy, sell, refinance, lease, or otherwise manage the property much as you always have. After your death, however, your Successor Trustee assumes responsibility for administering the trust according to your instructions. Because the trust owns the property, those assets generally pass to the named beneficiaries outside the probate process. By avoiding probate, your beneficiaries may receive the assets without lengthy delays, administrative costs may be reduced, and your family’s financial affairs remain private.
Remember That Creating a Trust Is Only the First Step
Do not make the common mistake of creating a revocable living trust but never transferring your real estate into the trust. Simply signing a trust agreement does not automatically transfer ownership of your property. Typically, your attorney must prepare and record a new deed transferring ownership from you individually to yourself as Trustee of your revocable living trust. If property remains titled solely in your individual name, it may still become part of your probate estate despite the existence of a trust, an outcome that defeats the purpose of the trust. Whenever you purchase additional real estate after creating your trust, you should also determine whether that property should immediately be titled in the trust.
Consider How Your Property Is Owned
Another way to transfer real estate after your death without relying on a Will is by using the right type of joint ownership which can automatically transfer property to a surviving owner upon death. Typically, joint ownership with rights of survivorship is the best option if you want the property to pass directly to a co-owner without the need to go through probate. California, however, offers several joint ownership options that may affect how property transfers after death, as well as important tax considerations. Selecting the most appropriate ownership structure depends on your overall estate planning goals, family circumstances, and financial situation.
Rental Properties Present Additional Challenges
Owning rental property introduces responsibilities that extend beyond simply transferring title after your death. When creating or updating your estate plan, you must consider questions such as:
- Who will collect rent?
- Who will authorize repairs?
- Who will communicate with tenants?
- Who will pay mortgages, insurance premiums, and property taxes?
- Should the property be retained as an investment or sold?
If multiple beneficiaries inherit the rental property together, disagreements regarding management frequently arise. One beneficiary may prefer long-term appreciation while another wants immediate cash through a sale. Fortunately, a properly drafted trust can authorize your Successor Trustee to continue operating rental property while providing detailed instructions regarding management, distributions, and eventual disposition.
Business-Owned Real Estate Requires Additional Planning
If you are a business owner, you may hold commercial real estate through a limited liability company, corporation, or a partnership. If so, it is vital that you incorporate a business succession planning into your overall estate plan to ensure that your business continues to prosper in your absence or that your loved ones receive the true value of the business after your death.
Plan for Incapacity as Well as Death
Within your comprehensive estate plan, you should do more than just dictate who will receive assets after you pass away. You should also consider who will manage your real estate if you become unable to do so yourself because of illness, injury, or diminished capacity. For example, if your rental properties require repairs, leases must be negotiated, mortgages need to be refinanced, or property taxes must be paid, a Will cannot give someone the legal authority to act on your behalf if you are incapacitated. The good news is that there are several other estate planning tools that can help prepare for incapacity, such as a Durable Financial Power of Attorney or a revocable living trust. Without these documents, your family may need to seek a court-appointed conservatorship before anyone can manage your real estate, resulting in additional expense, delay, and court supervision.
Do Not Overlook Property Taxes and Capital Gains Considerations
Although California does not impose a state inheritance tax, property transfers can still involve property tax reassessment issues, federal estate tax considerations for larger estates, and capital gains tax implications when appreciated property is eventually sold. In addition, inherited property may receive favorable income tax treatment through the adjustment in basis available under current federal law. Coordinating your estate plan with your accountant, tax advisor, and estate planning attorney helps ensure these opportunities are fully considered.
Out-of-State Property May Require Additional Planning
If you own real estate outside California, your estate plan should address those properties as well. Without appropriate planning, your family may be required to administer probate proceedings in more than one state. This process, commonly referred to as ancillary probate, increases costs, delays administration, and creates additional legal complexity. If you own multiple properties, you may choose to use a revocable living trust to simplify the transfer of real estate located in different states while avoiding multiple probate proceedings.
Do You Have Questions about Estate Planning for Real Estate Owners in California?
For more information, please join us for an upcoming FREE seminar. If you have additional questions about estate planning for real estate owners in California, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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