What rich parents need to know about real estate to heirs

A version of this article appeared for the first time in the Wealth Bulletin Inside Wealth of CNBC with Robert Frank, a weekly guide of the high -level high -level investor and consumer. Register To receive future editions, directly to your entrance tray.

The great transfer of wealth is leading to a great transfer of real estate, with up to $ 25 billion in real estate owned by greater generations that could be transmitted, and fight in their families.

According to Cerulli Associates, Baby Boomers and major generations and major generations transmit $ 105 billion by 2048. Real estate, including primary and vacation houses, as well as investment properties, are a large component. The silent generation and the Baby Boomers have almost $ 25 billion in combined real estate, according to the Federal Reserve.

However, with the property comes the conflict. Wealth advisors say that real estate delivery is increasingly full of financial and emotional difficulties for families, from taxes and maintenance costs to disputes on property and use. The direct solution is only to sell it and divide income.

“Some people want to retain the house and other children,” said Jere Doyle by Bny Wealth. “I can tell you, as a practical issue, there will be fights. There will be disagreements. You will not have the perfect situation.”

But lawyers and wealth planners say that there are measures that families can take to transmit real estate to minimize taxes, costs and family battles. Here are five secrets for successful real estate inheritances, be it an apartment in Park Avenue, a beach house in the vineyard or a ranch in Montana.

Passing vacation houses is the tense, said Elisa Rizzo by JP Morgan Private Bank. His clients often reduce their main residences later in life, but families remain attached to their second homes.

“That holiday house, often for our families that are very mobile, becomes the place of focused,” said Rizzo, head of advice of the family office at JP Morgan. “The holiday houses are where people go, and make really special memories of each other, be it an ski house in Vermont or a holiday house in Nantucket.”

Doyle advises against long -standing real estate before dying. If their heirs choose to sell the property, they have to pay taxes on capital gains on the appreciation of the property since the parents originally bought the property.

“If you give during their lives, children have their cost,” said Doyle, a heritage planning strategist for Bny's richness. “One of the things that people have to take into account is that the senior generation probably did not pay much for the property.”

There are ways to minimize tax burden, such as the use of a qualified personal residence trust. However, if you can wait, it is better to leave real estate to your heirs in your will or in a death trustee, according to Doyle. If the heirs then sell the property, they just have to pay taxes on capital gains on how much the house has appreciated since they inherited it.

Instead that the heirs have the property directly, the lawyers recommend placing houses in a limited liability company and establishing a trust for the benefit of children that have interest in the LLC.

These legal maneuvers protect the assets in several ways. For example, if a holiday house is rented and a tenant slips and falls, the heirs are not considered personally responsible for any damage.

“His other assets, actions, bonds are not subject to the claims of any creditor,” Doyle said.

It also protects the heirs from the liabilities of their brothers, according to Dan Griffith, director of wealth strategy at Huntington Private Bank. For example, if an heir presents bankruptcy, LLC's structure prevents creditors from putting a tax at the shared home, he said.

You can also save in transfer taxes giving interest in a LLC that owns the property instead of putting the names of the heirs in writing, said Griffith. Since these fractional interests are illegid, parents can claim a discount on the taxable value.

Parents can establish rules with an operational agreement for the LLC. Customers can use the document to ensure that the house does not end in the hands of their children's spouses, which is a common concern, according to Laura Mandel de Northern Trust.

“In general, families want to retain these properties along the bloodline,” said the fiduciary director.

Parents can restrict an interest of LLC to transfer to surviving spouses or ex of their children. With well -drawn confidence, it would be difficult for the spouse to play it in court, Mandel said. These operating agreements often include purchase provisions that allow heirs to buy from the spouse.

Parents can also use the document to guide how property is used, such as disposition How many holiday weekends obtain each child, who has the right to redecorate or if the house can be rented or used for weddings.

Leaving these problems without addressing can cause fights between brothers. Mandel recalled a set of four brothers with a large ranch in the west who frequently rented. After complaints that the ranch felt like a “VRBO”, Mandel helped the brothers get to an agreement on how the property could be used.

Money is the most common trigger for family disputes, Griffith said. An inherited house can quickly become a financial burden unless parents also leave aside cash to pay maintenance.

“What inevitably ends there is that a person pays the invoices, and then grows enormous resentment, because either that person has to ask his brothers or cousins ​​money and, sometimes, those people do not pay,” he said. “Or say: 'Hey, it is I who pay all the invoices. How can I not use this more frequently than any of you?'”

Doyle recommends that parents use liquid assets as commercializable values ​​or take a life insurance policy to provide the trust. This disbursement makes it possible for the brothers to stay in the house, even if they cannot afford the expenses.

“In many cases, you may have some children who can pay maintenance expenses, and others cannot, so how do you treat them equally?” said.

However, the operating agreement must still include a contingency plan to divide expenses if the trust is dries. This is especially important for houses in front of the sea that are expensive to ensure or susceptible to erosion.

Parents often assume that their children will want to keep the home, according to Mandel. However, even if the heirs initially agree, they can change their minds later. They may get tired of sharing a house with their cousins ​​or a death in the family changes the equation, he said. For example, Mandel worked with a family that owns a ranch where the only brother with a practical knowledge of the property died unexpectedly, which overturned the plan of the living brothers to execute the ranch.

It is important to plan the probability that some or all heirs want to retire. Doyle suggests creating purchase provisions that allow heirs to buy their interests from LLC from their brothers, even if they do not have liquidity, such as getting a note to pay. The assets in the trust can also be used to buy the interests of the brothers in the LLC.

“What should incorporate into any plan is to understand that people's circumstances and situations can and will definitely change,” he said. “Maybe they will have children, or their work changes, or their changes in health. Things change.”

This can be difficult for parents to reconcile, but keep the hands of the heirs tied defeat the purpose of a holiday house, Griffith said.

“If their grandchildren have no link with this place, nobody lives here, nobody grew up here, nobody cares, do you really care if you sell the place?” said. “If someone else really cares about it can enjoy it, is it something so bad?”