Seven out of 10 investors plan to leave real estate to their heirs, but more than half of them haven’t told their heirs about it, according to an Ameriprise survey conducted in 2022.
Even among rich heirs, passing on real estate without proper planning can lead to sibling strife. Who gets the Hamptons house for July 4th? What if one sibling wants to renovate the Aspen chalet and the others don’t want to split the cost?
“You have to start by recognizing that the family home or the vacation home is more than a financial asset. It is deeply personal,” Adam Ludman, head of tax advisory at JPMorgan Private Bank, told Business Insider.
Instead of leaving these thorny questions up to the kids, parents can control how the property will be managed after they die. They can gift the home using a trust that includes enough cash to maintain it. (If done before death, this can save on taxes, too, said Ludman.) Their chosen trustee looks after the property’s finances and, if the parents wish, has the power to sell or transfer the home under certain conditions.
Parents can also use operating agreements to allocate holidays to each sibling and control whether the home can be used for family weddings. They can even stipulate what types of property damage the trust will pay to fix if a family member is responsible. Operating agreements can go into exacting detail, but according to Ludman, it is important to leave some control up to the heirs.
“They can be granular, but they also need enough flexibility so the operation of the home is not overly restricted,” he cautioned. “Families obviously evolve and expand and circumstances can change.”
When equal isn’t equitable
Parents often assume that their adult children will share the property equally after they pass, according to Ludman. Instead, they should talk to their children – and possibly their partners as well – to assess their preferences.
“Does each of them have the same attachment to the home?” he asked. “Will they continue to use it with the same regularity? Will they be able to share equally in the expenses of the home?”
One of the most common dilemmas is having children with different incomes, he added. Perhaps two of three adult heirs are wealthier than the third, who doesn’t want to share the burden of property tax and other costs. The parents can account for this by putting funds in the trusts to cover their costs. Alternatively, they can put a buyout provision in the operating agreement that dictates how the two siblings can acquire the third’s stake.
While Ludman encourages allowing the heirs some degree of control, it is important to have a decision-maker in case the siblings reach a stalemate. The trustee can make the final call on issues like repairs, renovations, or even whether to sell the property.
Some parents prefer to give their children more power. Rather than using operating agreements, they can write a “letter of wishes,” Ludman suggested. This document is not legally binding but indicates how the parents would like the property to be used.
He said this is an important time for transferring homes and other assets. Currently, married couples can give away $27.22 million in assets without incurring the 40% federal estate tax. Unless Congress extends these Trump-era tax cuts, this exemption will be cut in half at the end of 2025.
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