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A podcast designed to help retirees and those nearing retirement navigate finances and life planning with expert insights from financial advisor Trevor Lawson. Tune in for practical strategies and inspiring ideas to ensure your retirement years are purposeful, fulfilling, and truly your best chapter yet.
*Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Branch phone: 919-546-0400.
Trevor Lawson: [00:00:00] Welcome to The Retirement With and On Purpose Podcast. I'm your host, Trevor Lawson, and this show is all about helping you not just reach retirement. But truly thrive in it. You've put in the work. Now let's make sure you can enjoy every moment to the fullest.
Today's episode is inspired by the time of year. So many of us may be gathering at a family vacation home and creating memories, hopefully fond memories at that. So what we're gonna talk about is what wealthy parents need to know about giving real estate to their kids, particularly vacation homes. Again, we may be creating memories in this time of year.
And this is inspired by a recent article at CNBC. And [00:01:00] again, you'll find it like always in the show notes, but here's a couple pointers on what wealthy parents need to think about before giving real estate to their kids. Quoting here, according to Cerulli Associates, $105 trillion is expected to be passed down by baby boomers and older generations by 2048.
$105 trillion. It's hard to even imagine, um, that amount. But that's what's gonna be passed down to future generations over the next 20 years. Of that 105 trillion, 25 trillion is going to be in real estate. So there's a huge estate planning opportunity here to make sure that that real estate is a passed down in a way that, um, is tax.
Efficient and also helps avoid family conflict. Quoting again here yet with property comes conflict [00:02:00] Wealth Advisors say Handing down real estate is increasingly filled with both financial and emotional pitfalls for families, ranging from taxes and maintenance costs to disputes over ownership and usage.
The straightforward solution is just to sell it and divide the proceeds. Some people want to retain the house and other children don't, says BNY. Whilst Jared Doyle, I can tell you as a practical matter, there's going to be fights, there's going to be disagreements. You're not going to have the perfect situation.
I've seen this time again in my own practice, um, if there's not a proper estate plan in place, something like real estate or other, um. Non kind of tangible assets, um, or excuse me, other assets that aren't, you know, liquid can create strife amongst the family, but lawyers and wealth planners say there are.
Measures families can take to more [00:03:00] effectively pass down real estate to minimize taxes, cost, and family battles. Here are five secrets to successful real estate inheritances. So we're gonna go through five today. Number one, transfer real estate in your will or through a trust to avoid a major tax bill.
Passing down vacation homes is the most fraught. Says an advisor at JP Morgan Private Bank. Her clients often downsize their primary residences later in life, but families stay attached to their second homes that vacation home. Often for our families that are very mobile becomes the centering place. The vacation homes are where people go and they make special memories with one another.
Whether it's a ski house or vacation home at the beach, Doyle advises against gifting long-held real estate before you die. If your heirs choose to sell the property, they have to pay capital gains taxes on the property's appreciation since the parents originally brought the property. [00:04:00] So in other words, if you, if you gift the, the property during your lifetime to your kids.
They essentially take over the basis that, um, that you have in the property. So think about in North Carolina, Wrightsville Beach for example. I mean, 30, 40 years ago, property values maybe what would be considered a, a heck of a deal based on where prices are today. So let's say you, you know, you bought a property down there for 200,000, 40 years ago.
And now it's worth 2 million if you went ahead and gave that property to your kids while you're still living, that 200,000 is what the, the kids' basis would be in the home. So if they do decide to sell it, that gain between 200,000 and 2 million in my example, is what they owe up taxes on. Whereas if you wait and keep the.
The house is part of your, your estate, [00:05:00] and then upon your passing, the kids inherit the house. They receive what's called a step up in basis, so their basis would be 2 million, the current property's value, and thereby they would avoid having to pay taxes on all of that appreciation you've seen over your lifetime.
So that's certainly worth considering, particularly for, for homes that have appreciated significantly over time. So another option would be, rather than having the heirs own the property directly, lawyers recommend placing homes in a limited liability company and setting up a trust for the kids' benefit that holds interest in the LLC.
An LLC or limited liability company owns the property and then we have trust in place for the kids to receive. You know, the interest in the, the, the, the property. These legal maneuvers protect assets in several ways. For instance, if a vacation home is rented and a tenant slips and falls, the heirs are not [00:06:00] held personally liable for any damage because.
It's owned by the unlimited liability company. It also shields heirs from the liabilities of their siblings. According to Dan Griffith, director of Wealth Strategy at Hunting Bank, for instance, if one, he files for bankruptcy, the LLC structure prevents the creditors from putting a lien on the shared home.
He said, you can also save on transfer taxes by gifting interest in an LLC that owns the property, rather than putting heirs names on the deed. So for a home that may be rented, this strategy could make a lot of sense for avoiding personal liability or if there's multiple kids involved and perhaps they, um, have different relationships with money, if you will.
It could, it could protect the property from, um, being claimed if one of your child's, one of your children ends up, you know, needing to file for [00:07:00] bankruptcy for various reasons. Number three, and this one's a big one, outline who gets to use the home and how parents can put rules in place with an operating agreement for the LLC.
Clients can use the document to make sure the home doesn't end up in the hands of their children's spouses, which is a common concern. Typically, families want to retain these properties along the bloodline. Parents can restrict an LLC interest from transferring to surviving or formal spouses of their children.
With a well-drawn trust, it would be difficult for the spouse to contest it in court. These operating agreements often include buyout provisions that allow the heirs to buyout the spouse. Parents can also use the document to guide how the property is used, such as laying out how many holiday weekends each child gets, who has the right to redecorate, or whether the home can be rented out for.
Or used for weddings. So as you're probably gathering, I mean these are some of the, the [00:08:00] biggest reasons why children will, um, bicker and, and have conflict or unresolved or undefined, um, intentions for who's gonna get the home when. Who gets to choose how the house is decorated at Christmas? Um, can the house be rented out for, for holidays?
All those things and potential conflicts can be avoided by having a, a well-defined operating agreement for the home if it's in a LLC. Fourth, fourth tip here. Set aside liquid assets for the house's, upkeep and insurance. Another primary reason for children's. Conflict money is the most common trigger for family feuds.
Griffin said, an inherited home can quickly become a financial burden unless the parents also set aside cash to pay for the upkeep. What ends up inevitably happening [00:09:00] there is that one person who pays the bills and then enormous resentment grows because either that person has to ask their siblings or cousins for money.
And sometimes those people don't pay or they say, Hey, I'm, I'm the one paying all the bills. How come I don't get to use this more often than any of the rest of you? Happens all the time. Um, Doyle recommends that parents use liquid assets like marketable securities or take out a life insurance policy in order to endow the trust.
This outlay makes it possible for siblings to hold onto the home even if they can't afford to share the expenses. So having liquid assets outside of the home that you define as part of your estate plan that are gonna be used for upkeep and insurance, the home can help significantly reduce the likelihood that some of these conflicts that are laid out here would arise.
Finally prepare for the likelihood that some heirs may want to cash out. Parents often assume that their [00:10:00] children will want to keep the home according to Mandel. However, even if they're, even if heirs initially agree to, they may change their minds later. Perhaps they grow tired of sharing a home with their cousins.
Or a death in the family changes the equation. She said. For instance, Mandel worked with a ranch owning family where the only sibling with working knowledge of the property passed away unexpectedly, which upended the living sibling's plan to keep the home. It's important to plan for the likelihood that some or all of the heirs will want to cash out.
Doyle suggests creating buyout provisions that allow heirs to buy their siblings LLC interest. Even if they don't have the liquidity, such as taking out a promissory note, the assets in the trust can also be used to buy siblings interest in the LLC. So as you've gathered here, I mean there's, there's a lot of legal and, and proper estate planning work that would need to be involved [00:11:00] to, to ensure that your intentions for this home that's meant so much to the family over time and where so many memories have been created.
To continue to be a, a foundational piece in the family's history and not be one that's where the good memories are. Overridden with bad memories due to conflict that could have been avoided through proper planning over time. Food for thought for those that are enjoying family, their their family home this time of year, and want to see that this home continues to create lasting memories for the family.
There are some precautionary measures that I encourage you to take note of to ensure that the home doesn't foster resentment amongst siblings over time. I hope you've found this valuable. As always, if you've got any questions or wanna discuss a topic further, feel welcome to Reach out to my team and I.
Otherwise, take care and I'll look forward to being with you again sooner.[00:12:00]
Thanks for tuning in to The Retirement With and On Purpose podcast. I hope you're walking away with new ideas and a fresh perspective on how to make the most of your retirement journey. And remember, retirement isn't the end. It's your time to live with purpose. Until next time, I'm Trevor Lawson. Here's to a fulfilling and thriving retirement.