Making Sure the Kids Get Your Real Estate ( as opposed to an "Unreal Estate")

So, you bought some real estate on which you plan to build your retirement home.  You made sure that it was big enough so all your kids could have a piece during your lifetime (or after) to build their homes.  Essentially you want to create the Family Compound.  Great idea that keeps the cherished grandchildren close and your children get the benefit of you experience (whether they want it or not).  

What are the ways to accomplish this dream?  There are a variety of ways to accomplish your goal.   While this is not a comprehensive list of all of the options, it does cover some of the easier transactions to accomplish this purpose.  

Simple Purchase of Property Using a Deed

Some of the benefits of a simple purchase by the children include:

• The property is immediately transferred to the children allowing immediate division of the property and development by all parties;
• The documents are straight forward and require less time (therefore expense) to prepare;
• The property conveyed to the children is not subject to the provisions of your will and probate requirements.
• Under current federal tax laws, you can gift $5,250,000 in property to your children with a tax exemption.

Some of the drawbacks:

• It would require an immediate division of the property among the children;
• This could trigger an "immediately due clause" in the original loan to purchase the property This requires payment immediately on any loan used to purchase the property.  However, it may not be enforced by the financing entity;  
• The immediately due clause may not be in the purchasing agreement or may not be enforced by the financing entity;
• The children would likely have to obtain a purchase loan with a mortgage to finance the property purchase, however, you could make the payments on behalf of the children. This option would complicate the situation as multiple payments may be due monthly depending upon how it is financed;
• Transfer of the property may include the mineral leasing rights if you currently own them. This would allow your children to lease the rights to an oil and gas company and receive royalty payments. However, you may not have the leasing rights which may have been separated from the land by previous owners. If the rights have been separated, then the previous owner can lease the property without your permission.

Lease with Provision for Transfer to Children

This involves leasing the property to your children for your lifetime and then specifically transferring the property to them in a will, other testamentary document or under a lease to purchase provision in the lease.

Some of the benefits include:

• This transaction is usually permitted under financing agreements incurred upon your purchase of the property;
• You retain any rights to develop the property or terminate the lease agreements;
• You retain title to the property;
• You retain mineral rights to the property if they have been transferred to you upon obtaining title to the property;
• You can specify in your will the exact division of the property among the children.    

Some of the drawbacks:

• A leasing agreement is usually not sufficient for your children to obtain financing to develop the property. It would be incumbent upon you to add any improvements;
• Ownership of the property by the children would not occur until probate of a will upon your death or the occurrence specified in the lease;
• Even though usually permitted, a financing entity may have the right to block leasing of the property.

A Straight Will Bequest

Some of the benefits include:

• Your retain use and title to the property until your death.  In your testamentary documents you have the choice of how the property is to be handled;
• During your lifetime, you have the option to sell, lease or separate the mineral rights to the property;
• Your children do not have the option of the disposing of the property or otherwise dividing it without your permission.

The drawbacks:

• Title to the property will not occur until your will is probated so that the children do not have the option of the disposing of the property or otherwise dividing it without your permission;
• Possible mortgage loan due immediately by your beneficiaries under your financing agreement;
• Children may require additional financing to develop the property if you provide permission.  This might be difficult without specifically transferring the property to them.

Create a Living Trust/Family Trust with Children as Beneficiaries

Some of the benefits:

• Transfer of property does not require a provision in the will that has to be probated.
• The trust can immediately transfer title to the property upon a set action, such as a death in the family; 
• The trust may take any action an owner may take such as entering into a mineral lease.

Some of the drawbacks:

• The title to the property is transferred to the trust and no longer in your name.  However, you may make yourself the manager and take actions afforded a property owner;
• Possibly has an acceleration clause requiring full payment on the purchase loan.

Straight Gift to Children

Some of the benefits:

• The exemption for federal estate taxes would apply unless your total estate is over $5,250,00.

Some of the drawbacks:

• A straight gift has all the Drawbacks as the Simple Purchase of Property Using a Warranty Deed or Other Deed above;
• A gift tax may apply depending on the value of the property and the transactions used to transfer the property;
• If your estate is valued over $5,250,00, than the exemption for federal estate taxes would not be available.

Create a Limited Liability Company and Transfer the Title

Some of the benefits include:

• LLC ownership means that the LLC can transfer title to children upon the death of the principles or upon another event (such as the “retirement” of the principles (yourself and your husband;
• Title in LLC's name which allows for division of the property by lease to the children or other arrangement;
• The LLC provides protection against lawsuits for any legal issues on the property (such as suit by a visitor to the property for injury incurred);
  Some of the drawbacks:

• Any federal tax assessed against the LLC is the responsibility of the owners;
• The purchase loan maker may require proof of assets of LLC or require the property to be held in the name of the principal individual property owner or require a “due on sale” provision in the loan documents.

It gets considerably more complicated with additional cases involving mineral rights, easements and restrictions on the property from previous transactions so you should contact a real estate attorney to get the specifics of your situation.

NOTE:  For a full investigation of the tax consequences of these transfers consult with a CPA.

Any and all information provided on this website by Edward Barrett, Esq. is under copyright. This information is for general knowledge purposes only and should not take the place of talking with an attorney regarding your specific situation.