Estate Sales and the Use of Trusts in Acquiring Real Estate Pierre - - PDF document

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Estate Sales and the Use of Trusts in Acquiring Real Estate

Pierre E. Debbas, Esq. Romer Debbas, LLP 183 Madison Avenue – Suite 904 New York, NY 10016 212-888-3100 PDebbas@romerdebbas.com www.romerdebbas.com I. WHAT BROKERS NEED TO KNOW ABOUT ESTATE SALES An “estate sale” is different from a normal sale or purchase since the person whose name is on the deed/stock and lease is not the person selling the property. The “estate”, which is the property and debts left by the client at death, must now sell his property and generally wrap up the affairs of the client. There are four main steps which must take place prior to an estate being able to convey title:

• 1. IS THERE A WILL:
• a. First question: “Did the client leave a will that disposes of the apartment?”
• b. Probate: When a person dies with a will, the will must be probated.
• c. Probate Process: As with any legal proceeding, there are technical aspects to

probate. i. Validity of Will: The court studies the original will (no copies accepted) to make sure that it’s genuine, has not been tempered with and complies with required formalities. ii. Appointing Executor: The will names an executor, who is the deceased client’s personal representative in wrapping up the affairs. The nominated executor must apply to the court in order to be

• fficially appointed to this post, and once that happens, the executor

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has the legal power to dispose of the decedent’s assets in the manner specified in the will. iii. Notice: Probate requires that notice be given to all interested parties so as to give them a chance to be a part of the proceeding and to give them a chance to dispute.

• d. Does the will give the estate the right to sell the apartment?

i. The will must be reviewed by an attorney to confirm that the deceased person intended for the property to be sold and for the proceeds distributed to the beneficiaries specified in the will. ii. If the will leaves the property to a specific person, the estate most likely is not authorized to sell the property. What if the Client did not leave a Will?

• a. Intestacy: If someone dies without a will, then the person dies “intestate”.
• b. Administration: Instead of probate, the legal process is called

“administration of an estate”. i. Administration of an estate arises if the deceased did not leave a will,

• r some assets are not disposed of by their will, or the will is invalid or

incomplete. ii. Administrators must be appointed - They perform a similar role to the executor of a will but, where there are no instructions in a will, the administrators must distribute the estate of the deceased according to the rules laid down by the state’s laws.

• 2. LETTERS TESTAMENTARY:
• a. What are Letters Testamentary: In both probate and administration, the

court issues to the executor or administrator a document called “Letters Testamentary”, or you may have heard them called “Letters of Administration” or “Letters of Representation”. i. The personal representative must be armed with this letter and a death certificate to take any action on behalf of the estate, such as banking, stock trading, real estate transactions, and other actions necessary to marshal and dispose of the decedent's estate in the name of the estate itself.

• b. Validity:

i. Letters Testamentary are valid for 6 months in NY, and are subject to renewals.

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ii. Must be valid at the time of closing; otherwise the personal representative will not be able to sell the property on behalf of the estate.

• c. No Power of Attorney: The personal representative must be present at the

closing in person.

• d. Estate Bank Account: Prior to closing, the personal representative must set

up an estate bank account since this is where the proceeds of the sale will be deposited.

• 3. PROBATE / ADMINISTRATION PROCESS OVERVIEW:
• a. The whole process can be broken up into 3 steps:

i. Marshaling of Assets: Collection, inventory, and appraisal of all assets that are subject to probate - one of the personal representative’s most important duties is to take inventory of the assets and create a list that must be filed with the court. 1) It is recommended to get an appraisal of real estate for (1) the estate tax return the estate will have to file and (2) depending on the scrutiny being shown by the interested parties, to have for any disputes that may arise ii. Debts: Paying bills, taxes, estate expenses, and creditors of decedent iii. Distribution of Property: Formal transfer of estate property according to the will or by the state laws of intestacy succession (if there is no will) - Once the court is satisfied that all required notices have been published, claims paid and assets accounted for, the property can be distributed to beneficiaries.

• 4. RELEASE OF IRS AND NYS LIEN OF ESTATE TAX:
• a. NYS Release of Lien of Estate Tax
• i. Definition: A release of lien is an authorization by New York State to

transfer real property or a coop apartment because it is deemed that no estate taxes are owed by the estate to New York.

• ii. Things to Know:

1) Once it is filed, expect at least one month for processing. 2) Separate Release of Estate Tax Lien forms must be filed for properties located in difference counties. 3) If there is a coop and real property – separate forms must be filed even if the properties are in the same county.

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4) A release of lien can't be processed until the estate's

• utstanding tax assessments have been fully paid.
• iii. What if there is no release of lien at closing?

1) This can be fatal to the transaction because the buyer would be taking on a big risk – that there are taxes assessed against the property and they would become responsible for them. 2) Sometimes the title company might accept an affidavit stating that there is no tax lien but most of the time, they would not be willing to insure without a release of lien.

• b. Federal Release of Lien of Estate Tax

i. IRS Estate Tax Lien – must be paid off, if any. ii. If there is no taxable estate for federal estate tax purposes, you can’t get a release of lien. Instead, an affidavit stating that no estate tax is due would be signed by the personal representative at closing.

• c. Estate Tax Rates for 2013

i. Federal Estate tax is only due on estates worth more than $5,250,000 (for individuals) and $10,500,000 for married couples. The tax is due

• n the sums above these exemption levels. The tax rate for sums

above the exemption amount is up to 40%. ii. NYS estate tax is due on an estate worth more than $1,000,000 at the tax rate of 16%.

• d. Marital Deduction

i. Marital deduction is a type of tax law that allows a person to give assets to his or her spouse with no tax imposed upon the transfer. For U.S. estate and gift tax purposes, there is no tax on transfers between spouses, whether during lifetime or at death. There is no limit

• n the amount that may be transferred.

ii. Non-Citizen: The marital deduction is only available if the surviving spouse is a U.S. citizen. iii. QDOT: If the survivor is not a U.S. citizen, the bequest must take the form of a specialized type of trust known as a Qualified Domestic Trust.

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II. DIFFERENT TYPES OF TRUSTS USED TO ACQUIRE REAL ESTATE

• 1. WHAT IS A TRUST?
• a. A trust is a fiduciary arrangement that allows a trustee, to hold assets on

behalf of beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.

• b. Testamentary vs. Inter Vivos Trusts:

i. Testamentary – A trust created upon death, under provisions of a will 1) The will usually specifies circumstances under which his/her executor should form such a trust. 2) Ex: if a child is under a certain age ii. Inter Vivos – A trust created while the grantor is still alive.

• 2. WHY DO PEOPLE CREATE TRUSTS?
• a. Avoid probate: Assets in a trust may also be able to pass outside of probate,

saving time, court fees, and potentially reducing estate taxes as well.

• b. Avoid will contest: If a person wants to leave out a child for example, that

child will get notice in probate and can cause significant delay and expense to the proceeding.

• c. Control of your wealth: You can specify the terms of a trust precisely,

controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.

• d. Protection of your legacy: A properly constructed trust can help protect your

estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.

• e. Privacy and probate savings: Probate is a matter of public record; a trust may

allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.

• f. Tax advantages: some trusts remove assets from a person’s estate and save on

taxes.

• 3. REVOCABLE TRUSTS:
• a. Definition: A revocable trust is created when the grantor transfers trust

property to the trust but reserves the power to alter, amend or revoke the trust. Since the revocable trust is an incomplete transfer, the creation of a revocable trust has no effect on the client's income, estate, or gift tax situation. The revocable trust gives the grantor the ability to observe the management of the trust assets without relinquishing ultimate control of the assets (assuming the grantor appoints a third party trustee). Thus, the grantor can generally

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terminate the trust and take back the trust assets at any time. The revocable trust becomes irrevocable only when the grantor modifies the trust to become irrevocable or dies and therefore is no longer able to modify the trust.

• b. Purpose:
• i. Privacy during life – Some people do not want their name as the owner
• f the public property records which would allow anyone to know how

much wealth they own in real estate and where that real estate is located.

• ii. Privacy at death – Unlike a will, which is probated, a trust document

does not become public record.

• iii. Assurance – The trust may provide greater assurance that the grantor’s

wishes will be met. Wills are more easily contested by disgruntled heirs and “want to be” heirs.

• iv. Administrative Ease – in the case of a “living trust” which holds all of a

person’s assets, it is easy for the trustee to have control and centralizes all the assets when the grantor passes away.

• 4. IRREVOCABLE TRUSTS:
• a. Definition: Irrevocable means the grantor totally gives up rights and powers

and walks away entrusting to the trustee all of the assets in the trust. Unlike a revocable trust, the grantor cannot modify or terminate an irrevocable trust without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust.

• b. Purpose:
• i. Estate and Tax considerations – The benefit of this type of trust for

estate assets is that it removes the trust's assets and their appreciation from the grantor's taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets.

• ii. Avoidance of Probate – since the property is not owned by the

individual but rather by the trust, it does not need to go through probate.

• iii. Asset Protection – a trust may be structured to protect the funds from

law suits, creditors or irresponsible children and their creditors.

• iv. Privacy – similar to revocable trusts, irrevocable trusts provide privacy

since the owner’s name is not in the public record.

• v. Avoid will contest: As discussed previously, avoiding probate could

avoid possible litigation by a disgruntled relative.

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• 5. QTIP TRUSTS:
• a. Definition: "Qualified Terminable Interest Property"; For estate tax purposes,

any property which passes to a decedent's surviving spouse is not subject to the gift or estate tax; however, generally full ownership of this property must in fact pass to the surviving spouse. A QTIP Trust is an exception in that as long as the surviving spouse has a lifetime income interest in the property, the property is treated as passing to the surviving spouse even though the remainder passes to another beneficiary.

• b. Purpose: The first spouse to die may wish to provide for the surviving

spouse, but nonetheless designate where the money will go after that spouse is

• deceased. This is particularly useful when a decedent desires that his or her

properties be distributed to (i) spouse for life and (ii) remainder to children (particularly if from a prior marriage). While alive, the surviving spouse will benefit from the income from the deceased spouse's assets. If there are children from a prior marriage, individuals may use this trust to prevent the surviving spouse from diverting the individual's assets to other persons such as a successor spouse.