The Baby Boomer Generation is poised to pass on a significant amount of property and that is often referred to as the "Great Wealth Transfer." This in itself represents a significant shift in the real estate market.
According to Fortune, "Baby Boomers have kept the housing market alive and they are still powering it, as Fortune has previously reported (they also hold half of the country’s wealth). Still, not all Baby Boomers are selling."
According to GoBankingRates, "Baby Boomers are currently handing down more than $53 trillion to their heirs in one of the greatest transfers of generational wealth in history."
According to Rose Elder Law, "Not talking to your adult children about their inheritance comes at a cost..." "When children don’t understand your inheritance intentions, it can result in arguments and legal battles among siblings and other heirs after you’re gone. The solution is a mature discussion with your inheritors, sharing details of your estate plan relevant to your child."
According to The Guardian and reported by The Resolution Foundation, "The Resolution Foundation said inheritances would more than double over the next two decades. It expects the peak year to be 2035, as the baby boomer generation – who have benefited most from the huge increase in house prices – progress through old age."
For Baby Boomers who own real estate, determining the best course of action for managing these properties as they plan their legacies can be a daunting task. Whether it is deciding to sell, rent, continue living in, or leave the properties vacant, each option carries its own set of benefits and implications, especially when it comes to estate planning and inheritance.
Here is a detailed look at these choices and strategic considerations involved, and a suggested 10-step plan for Baby Boomer consideration.
Information & Options
Selling the Property
Selling real estate can be a wise decision for those looking to simplify their estate, liquidate assets for retirement, or eliminate the burden of property management from their heirs. The Dallas-Fort Worth real estate market has been robust, and selling at a market high could maximize financial returns. This influx of cash could then be invested in more liquid assets or used to enjoy a more comfortable retirement. From an inheritance perspective, liquid assets may sometimes be easier to divide among multiple heirs compared to real estate, potentially reducing the likelihood of disputes.
Renting Out the Property
Renting offers a steady stream of income, which can be particularly appealing for retirees seeking to supplement their pensions or retirement savings. This option also allows Baby Boomers to retain ownership of their properties, keeping them as part of the family asset pool, which can be passed down to future generations. However, becoming a landlord involves ongoing responsibilities, such as maintenance, finding and managing tenants, and dealing with legalities of leasing. For those not wanting to handle these duties personally, hiring a property management company could be a solution, albeit at a cost.
Living in the Property
Choosing to continue living in a property can be the simplest option if the home is paid off and maintenance costs are manageable. This option ensures stability and keeps the sentimental value of the family home intact. As part of estate planning, homeowners can explore setting up a life estate or utilizing a lady bird deed, where the property automatically transfers to heirs upon the owner's death, bypassing probate.
Leaving the Property Vacant
Leaving a property vacant is less common due to the potential downsides, such as the risk of vandalism, squatting, the cost of ongoing maintenance without any income to offset expenses, and possible depreciation due to neglect. However, this might be considered if the property is expected to significantly increase in value or if it is being held for a specific future purpose, like development. In such cases, ensuring that the property is secure and well-maintained is crucial, and expenses must be carefully managed to prevent draining financial resources.
Texas Inheritance Laws and Real Estate
Texas law facilitates the inheritance of real estate, especially with a valid will in place. In the absence of a will, property is distributed according to state intestacy laws, which may not reflect personal wishes. To avoid potential disputes or unintended distribution, it is advisable to clearly outline the disposition of real estate in a will.
Estate Planning Tools for Real Estate
Wills: The most straightforward tool, a will specifies who inherits your property, including real estate. It is crucial to ensure it is updated to reflect current holdings and relationships.
Trusts: Establishing a trust can provide more control over real estate assets. A living trust, for example, allows you to manage the property during your lifetime and seamlessly transfer it upon your death, avoiding probate.
Life Estate Deeds: This arrangement allows you to transfer property to a beneficiary at death while retaining the right to use it during your lifetime. It is a useful tool for ensuring continuity without the complexities of probate.
Estate Planning Considerations
For Baby Boomers, especially in Dallas-Fort Worth, incorporating real estate into estate planning requires careful consideration of Texas laws. Texas offers the advantage of no state estate or inheritance tax, but estate planning tools like wills, trusts, and joint ownership arrangements should be employed to ensure real estate assets are handled according to the owner’s wishes after their passing.
Professional Advice Is Key
Given the complexities involved in managing real estate assets for inheritance purposes, seeking advice from estate planning attorneys, financial advisors, and real estate professionals is highly advisable. These experts can provide guidance tailored to individual circumstances and help craft a strategic plan that considers tax implications, legal requirements, and personal family dynamics.
In conclusion, Baby Boomers need to weigh each option carefully, considering their personal circumstances, market conditions, and long-term family goals. With the right planning and professional advice, they can ensure that their real estate decisions align with their overall retirement and legacy plans.
As Baby Boomers, especially in Dallas-Fort Worth, consider the future of their real estate assets, strategic planning becomes crucial. Whether contemplating selling, renting, living in, or leaving their properties vacant, baby boomers must weigh multiple factors to ensure their real estate decisions align with their retirement and estate planning goals. Here are 15 considerations for managing real estate inheritance:
15 Considerations
1. Current Market Value: Understanding the current market value of properties helps in making informed decisions about selling or holding onto assets. It is essential to regularly assess how the local market is performing to time your decisions optimally.
2. Capital Gains Tax: Selling a property can lead to significant capital gains tax implications. Knowing the tax consequences ahead of time allows for better financial planning and potential strategies to minimize tax liabilities.
3. Maintenance Costs: Consider the ongoing costs associated with maintaining a property. These can be burdensome, especially if one is on a fixed retirement income. For vacant properties, maintenance is still necessary to preserve the asset's value.
4. Rental Income Potential: Evaluating the potential rental income of a property is crucial. This income can supplement retirement earnings but comes with the responsibility of managing or overseeing property management.
5. Property Management: Whether to manage a property personally, hire a property manager, or utilize a property management company is a significant decision that impacts stress levels and profitability.
6. Insurance and Liability: Properties need to be adequately insured to protect against potential liabilities, especially if they're rented out. This includes understanding the coverage required for vacant properties, which may be higher due to increased risks.
7. Legal Compliance: Landlords must comply with local and state regulations, including safety codes and tenant rights. Non-compliance can result in fines and legal challenges.
8. Market Forecasting: Insights into future market trends are invaluable. Will the area appreciate in value, or is it in decline? This can influence decisions to sell, rent, or hold.
9. Liquidity Requirements: Real estate is not a liquid asset. Baby Boomers need to consider their need for liquidity for health expenses or other retirement activities.
10. Estate Planning: Proper estate planning ensures that real estate assets are distributed according to one's wishes. This might involve setting up trusts, wills, or other legal structures to facilitate smooth transitions.
11. Emotional Attachments: Emotional ties to a property can complicate decisions. It is important to objectively assess the best financial and practical outcomes while considering sentimental values.
12. Heirs’ Interests: Understanding the desires and needs of heirs can guide decisions about real estate. Some may prefer inheriting property, while others might favor liquid assets.
13. Probate Considerations: Properties included in a will can go through probate, potentially leading to a lengthy and costly process. Tools like transfer-on-death deeds or trusts can bypass probate.
14. Future Developments: Being aware of planned developments in the area can influence property values positively or negatively, impacting decisions to sell or hold.
15. Professional Advice: Navigating the complexities of real estate inheritance requires advice from real estate experts, financial advisors, and estate planning attorneys. Professional guidance ensures decisions are well-informed and legally sound.
Suggested 10-Step Guide:
1) Secure the property and its contents.
2) Determine the property's value through a professional appraisal.
3) Consult with a real estate attorney to ensure legal transfer.
4) Understand the tax implications.
5) Discuss with all heirs to understand their wishes and expectations.
6) If selling, prepare the property for sale and list it on the market.
7) If renting, prepare the property for tenants and start the rental process.
8) If an heir is moving in, coordinate the move.
9) Divide the proceeds or responsibilities among heirs as agreed.
10) Keep all records for tax purposes and future reference.
Bottom Line
Inheritance can be a complex process. Understanding the options and considerations and having a well thought out plan can make the process smoother and more beneficial for all involved.
If you or a loved one are involved in or have questions about inheritance properties, contact us. We can help you navigate the real estate related aspects and process and would be honored to assist you.
Disclaimer: This blog post, and associated blog posts, and our website are not designed to and do not provide medical or legal advice, professional diagnosis, opinion, treatment, or services to you or to any other individual. Through this series, the associated blog posts, and our website, and linkages to other sites, Transformation Advisory, LLC DBA DFWREAdvisors Group, provides general information for educational purposes only. The information provided in the series, the associated blog posts, this website, or through linkages to other sites, is not a substitute for medical, legal, or professional advice or care, and you should not use the information in place of a visit, call, consultation, or advice of an attorney, mortgage professional, real estate professional, medical professional or other licensed services provider. Transformation Advisory, LLC DBA DFWREAdvisors Group is not liable or responsible for any advice, course of action, or treatment, or diagnosis, or any other information, services, or product you obtain as a result of reading this series, the associated blog posts, this website, or through its linkages to other sites.