You may recall the words of Gerald O’Hara (Scarlett’s daddy): “Why, land is the only thing in the world worth workin’ for, worth fightin’ for, worth dyin’ for, because it’s the only thing that lasts.” Would Gerald like your estate plan?
Perhaps you own land. It could be your marital home, a vacation home at the beach, or even a family farm. You may have had the foresight to craft your estate plan and execute a will stating that the estate will be divided equally among certain beneficiaries, for example, your children. Though such a plan will result in your children each owning an equal interest in your real estate, this may not be the best approach.
Real property in North Carolina is generally not considered a probate asset. The clerk of court who oversees the probate of your will does not oversee the division of your real estate among your children. At the moment of your death, absent a contrary direction in the will, the title to your real property vests in the children. From your death forward, your children are responsible for the property taxes, maintenance and insurance that are associated with the real property. The Executor who handles your estate administration is not authorized nor allowed without permission to pay those expenses. If a sale of the real property is to occur, the children must act together to conduct the sale. They must choose a realtor, agree on whether to make improvements or repairs, agree on a listing price, determine whether to accept or decline offers to purchase, and sign all the necessary papers. In my experience this process does not always run smoothly. Children often disagree regarding whether they want the property sold, and even if they agree it should be sold, the details of the sale are often in contention. If the children decide not to sell the property, then the issues that often are who will be responsible for handling the payment of the property taxes, insurance, and maintenance and how does one child ensure that the others will contribute?
If you are a child who already owns property with siblings, you may all agree that one of you can handle the details and decisions associated with a sale of the real property. You then may each give a power of attorney referencing the specific piece of real estate to that one child who will handle the sale. If some of the children want to sell the property and others do not, those wishing to sell the property can force the sale through a partition action. If all of you agree not to sell the property, then you may all want to choose one person (perhaps rotating this job annually) to be in charge of collecting money from the others for payment of the expenses.
If you are the owner of real property and are determining how best to benefit your children, your options are several. If you want to ensure that the real property will not be sold immediately, you might choose to place your real property at your death in a trust naming one person to serve as Trustee of the trust. If this is your chosen course, you must fund the trust with liquid assets in addition to the real property so that the Trustee has available funds to use to pay the taxes, insurance and maintenance.
Another option is to direct that your Executor sell the real estate. This option ensures that only one person is involved in the decision-making regarding the sale of the real property.
If your Executor sells the real estate, the proceeds from the sale are considered commissionable, which compensates the Executor for the work involved in preparing the house for sale, the liability associated with selling the property, and overseeing the details of the sale.
The negative of directing the sale in the will is that it does not allow for market timing, a fact that in today’s economic climate is more negative than usual. It also removes the decision from your children, which, depending on their attitudes and personalities, may be more positive than negative.
You might think it better to give away your real property during your life rather than wait until you die. Be aware that if you give your children your real estate, they will take it from you with your cost basis as their cost basis. If you leave it to them as an inheritance, then the property will be valued as of date of death for the cost basis. This step-up in basis can be hugely valuable to your children, eliminating large capital gains accumulated over years of ownership. Note as well that a gift of real estate is likely to trigger gift tax issues as well.
As usual my message is be thoughtful and consider your options thoroughly for the benefit of your loved ones. Avoid turf wars by negotiating peace ahead of time.
Originally published in Southern Neighbor, February 2010