Estate Planning for Real Estate Owners

Owning real estate—whether it's your family home, a rental property, or a commercial building—is a significant investment. Proper estate planning ensures that your valuable properties are protected, managed, and passed on according to your wishes. Understanding the role of trusts and the associated tax implications is crucial in this process. Here's a straightforward guide to help you navigate estate planning for real estate ownership.

Understanding Trusts in Estate Planning

Trusts are essential tools in estate planning, offering flexibility and protection for your real estate assets. There are two main types of trusts to consider:

Revocable Living Trusts

A revocable living trust is the most popular type used in estate planning. Here's why it's beneficial for real estate owners:

• Avoids Probate: Placing your real estate in a revocable living trust allows the property to bypass probate, a legal process that can be time-consuming and costly. This ensures a quicker and smoother property transfer to your beneficiaries after your death.
• Maintains Control: As the trust's creator (the grantor), you retain complete control over your property. You can change the trust, update beneficiaries, or even dissolve the trust entirely while you're alive.
• Tax Implications: While the trust is active and revocable, it doesn't affect your taxes. The property remains part of your taxable estate, and you report any income or deductions related to the property on your personal tax return.

However, once you pass away, the revocable trust becomes irrevocable. At this point, the trust itself may become subject to income taxes unless it is distributed to beneficiaries, who would then be responsible for the taxes.

Irrevocable Trusts

An irrevocable trust involves permanently transferring your real estate from your personal ownership. This type of trust offers distinct advantages:

• Asset Protection: Real estate in an irrevocable trust is protected from creditors, lawsuits, and even divorce settlements, adding a layer of security to valuable assets.
• Estate Tax Reduction: Since the property is no longer part of your personal estate, it can help lower your overall estate tax liability.
• Tax Treatment: An irrevocable trust is treated as a separate taxable entity. As of 2024, income generated by real estate within an irrevocable trust is taxed at the trust's rates, which can be as high as 35% once income exceeds $11,150. However, you can structure the trust to pass income to beneficiaries, who typically face lower individual tax rates.

The main trade-off with irrevocable trusts is that you relinquish control over the property. Once the real estate is transferred, you cannot alter the terms or reclaim the property, making it essential to consider this option carefully.

Estate Taxes and Real Estate

Estate taxes are a significant factor in estate planning for real estate owners. Here's what you need to know:

• Federal Estate Tax Exemption: In 2024, the federal estate tax exemption is $13.61 million for individuals and $27.22 million for married couples. If your estate exceeds these amounts, the excess is taxed at 40%.
• State Estate Taxes: In addition to federal taxes, 12 states have their own estate or inheritance taxes with varying exemption limits and rates. It’s essential to consider both federal and state laws when planning your estate.
• Reducing Estate Taxes: Utilizing strategies like irrevocable trusts or making lifetime gifts can help lower the taxable value of your real estate holdings. These strategies can significantly reduce or even eliminate estate tax liabilities, ensuring more of your property is passed on to your beneficiaries.

Future Considerations

The current federal estate tax exemption is set to decrease after January 1, 2026, potentially reverting to around $6–$7 million per individual when adjusted for inflation. Proactive estate planning is essential given the uncertainty of future tax laws and the unpredictable appreciation of real estate values.

Real estate owners can protect their assets against potential future tax increases by establishing trusts and implementing strategic gifting plans. Working with an experienced estate planning professional ensures your strategies remain effective and adaptable to changing laws.

Key Takeaways

• Choose the Right Trust: Based on your estate planning goals and how much control you wish to retain over your real estate, decide between a revocable living trust and an irrevocable trust.
• Understand Tax Implications: Be aware of how different trust structures impact your tax liabilities both during your lifetime and after your passing.
• Plan for Estate Taxes: Use estate planning strategies to minimize or eliminate estate taxes, ensuring more of your real estate assets go to your beneficiaries.
• Stay Informed: Estate planning laws, especially taxes-related, can change. Regularly review and update your estate plan to reflect current laws and evolving circumstances.

Effective estate planning is vital for real estate owners who want to protect their investments, reduce tax liabilities, and ensure their properties are distributed according to their wishes.

By understanding the roles of various trusts and staying informed about tax implications, you can create a solid estate plan that safeguards your real estate legacy for future generations.

For personalized advice and to start planning your estate strategy, you should consult an experienced estate planning professional who can guide you based on your unique real estate holdings and financial situation.

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Michael Abraham, REALTOR | DRE# 02242095. |?[email protected]?| (323) 719-8585