Q: My wife’s youngest daughter is concerned about how we have set up our estate. We own three properties in Southern California and use two as rentals to supplement our retirement. All three properties are held in our living trust.
The trust states that each of our 6 children (aged 35 to 52 years old) have the right of first refusal to buy any of the houses, and, if they do, they will have to pay off their siblings. Our youngest daughter was told that it would be better if the properties were held in an LLC and have the name of one of our adult children on title with us.
Is that a good idea? Are there any advantages or disadvantages to doing this (besides creating jealousy among them)?
A: We don’t agree, for a number of reasons.
Let’s start with the obvious: You seem to have a plan in place that you liked when you set it up and apparently still works for you. We don’t know why you’d want to make a change when something is working and we’re not sure why you’d want to put those properties into a limited liability company (LLC). You will have expenses in setting up the LLC and transferring those properties to the LLC.
We also don’t know whether the transfer to the LLC will trigger any changes in your real estate taxes. You live in California, and the state offers certain benefits for homeowners that limit tax increases while you live in it as a primary residence. You should consult with a real estate attorney in your area to see if the transfer would trigger a change in your real estate taxes.
You mentioned that your daughter was told that it would be better for you to hold your properties in an LLC, but you didn’t mention who gave her that advice. Is she a real estate attorney or estate attorney? If so, then you should press her to explain her suggestion.
Otherwise, her advice concerns us. Right now, you and your wife control those properties and can do what you want with them. Upon your death, or your wife’s death, we presume that the surviving spouse will be the sole beneficiary under the trusts.
Was your daughter suggesting that the owners of the LLC would be you and your wife along with one of your kids? If all three properties are in the LLC, the child who’s in that LLC with you would effectively get control of those properties upon your death. Worse, that child might become the owner of the entirety of those properties no matter what your wills state.
With the way you’ve constructed your property portfolio, it’s clear that you want these properties (or their value) divided equally among your children upon your death. You’ve set up a pretty good system for allowing your kids to decide who should wind up owning what, if anything, and it’s easy to understand. If any one of your children wants to own a particular property, that child would have to buy the property and pay off the other siblings. That sounds fair and reasonable.
Still, times do change. Perhaps this is a good time to revisit the issue and go over your estate plan with your attorney. You might decide to keep everything exactly as it is now, or, if other parts of your estate have grown, you might opt for a few tweaks to the plan. But these changes would be on terms that you decide, while asking questions and getting answers from a person you trust and know can set up the estate plan for you.
Your daughter is likely trying to help, but we could imagine a situation where you put the properties into one or more LLCs and you lose the stepped-up basis upon your and your wife’s death. Under current law, when you and your wife die, your kids will inherit your properties at the properties’ value at around the time of the last one of you to die. This means that if you have a huge appreciation on these properties (and huge profits), your kids wouldn’t pay tax on those profits if they sell the properties shortly after you die.
Or if they keep them and sell them down the road, they will only pay profits on the appreciation from and after the value at the time of the last one of you to die. It’s a huge benefit to children to not have to pay taxes on that profit, and California real estate values (like so many places in the country) have skyrocketed over the last several years.
When you put any of those properties into the LLC with your kids as co-owners of the LLC, you’d likely find yourself with a big headache from a number of perspectives: valuation, real estate taxes, the expense of setting up a new plan, California tax, etc.
Play it safe, and talk to your estate attorney before doing anything. Once you’ve made up your mind, call a family meeting and share your estate plan and (more importantly) the thinking behind it with your children. They’re old enough to understand your reasons, even if they think they know better.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)