Insights: Series 1
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How an Estate Plan Helps Avoid Probate

Learn how estate planning and trusts work together, and how you can take advantage of them to protect your home or cottage Up North.

When you own real estate and want to pass it on to your future generations, planning becomes an especially important family issue that requires careful thought and consideration.

This is especially true here in Northern Michigan where so many families own second homes, cottages, or even large parcels of recreational land.

When you’re deciding how best to leave your real estate to your children or other heirs, you’ll want to weigh all of your goals and options along with the potential future consequences of your choices.

But before you do, it’s a good idea to understand how estate planning works with real estate.

What’s an Estate?

In simple terms, an estate represents all the things you own. It is your total net worth as it takes into account all of your assets, like a home, minus any liabilities such as a mortgage.

Since the real estate that you own is considered an asset, it’s part of your estate. Other common assets of an estate could include bank accounts, stocks, and personal items like jewelry, collectables, cars and boats.

Avoiding Probate and Red Tape

When you intend to have your children or other beneficiaries inherit your home or cottage, you’ll want them to avoid an often lengthy and expensive legal process called “probate.”

Probate is a court settlement process that is required by law if, for example, your estate wasn’t accompanied with specific or complete instructions of what to do with your estate’s assets after you have died.

Estates can land up in probate if you don’t create an estate plan, the plan is insufficient, or none of your plan’s beneficiaries can be found (or they’re no longer alive).

The probate court’s job, then, is to determine what happens to an estate’s assets. It accomplishes this by following rules called “intestate succession” laws.

Intestate succession provides rigid guidelines that the court must follow to determine what happens to probated estates. Basically, this is a who-get’s-what decision process. Aside from the time and expense of probate, it’s definitely something you would want to avoid because you then lose control over who inherits your assets, no matter what your intentions.

One of the best ways for your estate to avoid probate, and all its costs and complexity for your heirs, is to create a living will and a trust. These two important items are a fundamental part of a proper estate plan.

When Probate is Required

Probate, in all likelihood, will be required in the following situations:

  • There is no will;
  • A will exists but is incomplete;
  • Named beneficiaries can’t be found or are all deceased;
  • There are claims against the will;
  • There are claims against the executor.

And when it comes to any real estate that you own, if upon your death the property is neither jointly owned with someone who is still alive (a spouse, for example), nor in a trust, then your estate and heirs are going to probate.

Putting Real Estate into a Trust

A near foolproof way to avoid legal complications with the real property of your estate is to make sure you have a completed will, and to put your home into a trust.

Important: There are many types of trusts and, especially for real estate, some may be better than others. Working with your estate planning professionals will help you determine what’s best for you.

A trust is a legal entity that, in the law’s eyes, has its own individual rights. In this way, a trust is very much like a business entity such as an LLC, or even another person.

When you own real estate and place it into a trust, it then belongs to the trust. And upon your death, the trust survives while still owning the real estate.

While experienced professionals should always be consulted, putting your real estate into a trust isn’t necessarily a difficult process. In some cases, transferring real estate into a trust is as simple as filling out and filing a “quitclaim deed.”

Revocable Trust Example

A type of trust called a “revocable trust,” also known as a living trust, can be used to illustrate some of their advantages. Here, we’ll consider two main reasons to put your real estate into a revocable trust:

  • So your heirs can avoid the probate process; and
  • They can take advantage of a tax valuation benefit known as a “step-up in basis.”

While we already covered why the first point is important, you should understand the basic tax benefit of inheriting real estate in northern Michigan that’s held in a revocable trust.

This can best be best understood by looking at a simple example:

Let’s say you and your spouse own a second home in Harbor Springs that you bought for $150,000 many years ago. This amount is referred to as your “basis.” If you were to sell the home in today’s market, you would receive $750,000 at fair market value, resulting in a taxable gain of $600,000 from the sale.

In some situations, the same could happen to those individuals who inherit your home as beneficiaries of your estate.

But if you were to transfer the same home into a revocable trust during your lifetimes, your heirs could be positioned to receive what’s called a “step up” in the home’s basis to the current fair market value.

Using our example, the basis for the home’s new owners would be stepped up to a basis of $750,000 instead of your original basis of $150,000. Were they to sell the home, the change in basis would benefit them because there would be virtually no taxable gain ($750,000 – $750,000 = $0).

Plan Ahead to Protect Your Home and Property

Estate planning and inheriting real estate doesn’t have to be a confusing topic.

But as we have shown, proper planning is essential when you intend to leave real estate to others after your death.

With some thought and consideration, your heirs can avoid both probate and excess taxes when inheriting your home, cottage or piece of land located in northern Michigan.

Just remember to seek out trusted professionals such as an estate planning attorney, accountant, financial advisor, and even a realtor who’s knowledgable in such matters, to find the answers and guidance you need.

All content on this website is for information purposes only. Any information contained herein is not intended to provide legal or financial advice, nor does it create an agency relationship. All information is made available without any guarantee, warranty, or representation of any kind. It is your sole responsibility to seek the services of your own legal, financial, accounting, and real estate professionals prior to any such related decisions or transactions.

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