According to HGTV, forecasts estimate that more than 30 million people will invest in a second home over the next ten years. Our Chapel Hill estate planning attorneys address a few concerns below and pair each issue with a potential planning tool:
- Creditors and judgments. Unexpected job loss, health decline, or a lawsuit could compromise a property during the owner’s lifetime. If pending suits or outstanding debts have not been settled before the owner’s death, property intended for heirs could be seized by creditors, tapped with a lien, or otherwise transferred to the pockets of a party other than surviving family. Forming a limited liability company (LLC) to hold title to the real property and holding one’s LLC interest in a living trust, or transferring the real property ownership to an irrevocable trust, may help to shield the property from these types of claims. This preservation method generally needs to be done far in advance of any potential claims in order to be effective.
- Probate in each state. If the homeowner holds title in their own name, when they die the property (or their interest in the property, if held as a tenant in common) must pass through probate in the state where the property is located. Depending on the state and the size of the probate estate, this process may be costly, cumbersome, and stressful for surviving family members who have lost a loved one, particularly if the decedent owned homes in two, three, or more states. In addition to the time-consuming process of juggling multiple probate filings, the personal representative handling the estate administration must observe the unique probate statutes of each state. For example, if a father dies and owned property in New York and North Carolina and named his adult son who resides in New York as executor of the estate, North Carolina requires a state resident to act as an agent on behalf of out-of-state executors. If the owner had instead created a trust and held property title in the name of the trust, the named trust beneficiaries may receive their interest in the property without going through probate.
- Tax matters. Depending on how the home was titled prior to death and whether the home was retitled in the intended heir’s name prior to the owner’s death, capital gains tax implications might arise. Learn more about issues with titling real estate. Depending on the state where the property is located and probate is filed, the heir might be required to pay an inheritance tax or a state estate tax. North Carolina does not have an inheritance tax nor a state estate tax as of this writing. If a property owner coordinates proper planning during their lifetime and holds title to real estate in a revocable living trust, the property would pass immediately to beneficiaries with no probate nor inheritance or state estate tax implications. Should the beneficiaries elect to sell the property, however, some tax issues may arise. These should be reviewed on a case-by-case basis.
- Maintenance. The property owner might leave investments or savings and instructions in their will to use the funds for the care of the property. However, a testator’s wishes are not binding if these assets are left to beneficiaries outright. Also, the assets intended to cover property maintenance could be subject to creditor claims. Leaving assets to beneficiaries in trust would help to achieve the owner’s intent in this situation. Not only could a trust be established to hold title to the property for designated beneficiaries, but it can also include provisions that only permit trust distributions for payment of property taxes, insurance, and upkeep. At the same time, if the property is held in an irrevocable trust during the grantor’s lifetime, this may help to prevent creditor claims as described above. Of course, the owner might not leave funds for the care of the home at all. A property that is particularly cumbersome for heirs to maintain might prompt them to disclaim the inheritance.
- Disclaim. If upkeep on the home is too costly, the heir has no interest in using the property for rental income, or the heir does not want the tax burden associated with the sale of the home, they could disclaim the inheritance. The statutes of the state where the property is being probated will determine the procedure for disclaiming. Learn more about disclaiming inheritances in North Carolina.
Heirs should consider the type of property in addition to where the home is located when planning for whether to accept the property and how to manage it. For instance, a single-family home, condominium, co-op, and timeshare all have unique regulations.