So what are the practical steps? What are the considerations? What can you do?

So how to avoid probate if you own a co-op apartment. The reason we are talking about this today is because I had a couple of clients coming with exactly this question to me. And it happened in the past, and it takes a bit of back and forth thinking.

And obviously the best is to discuss it with an estate and trust attorney. But once again, this question very often pops up if there is a change in circumstances in a family who owns a co-op apartment, and people start to think about legacy, about their beneficiaries. And the most important question that pops up is, how can we simplify the process when we no longer there?”

“How can we make life easier for whoever takes over our co-op apartment? What can we do to make it more simple? So Dalia, who do we have as today’s guest, who will help us to talk about this?

Orsolya and I are so excited that joining us on our podcast today is our very favorite trust and estate attorney, Bracha Etengoff. She is a wonderful trust and estate attorney with a lot of knowledge, and she’s going to help us out today through this somewhat complex topic. Bracha can be contacted at her email, bracha at brachalaw.com.

And her phone number is 347-640-0993.

Of course, that is all on our website, and we have all the resources to get in touch with her if you have any issues or anything that you need to get in touch with her about regarding these topics. So we’re really excited to have her today because probate is sometimes a scary word for attorneys who don’t do probate, especially some real estate attorneys. So it’s great to have her with us to help us out with some of these topics.

Welcome, Bracha.

Thank you so much, Dalia. It’s great to be here.

“Bracha, so let’s dive in. So what is probate and what is the problem for a co-op apartment? So many New Yorkers own a co-op apartment.

Sometimes it’s the only ownership is a co-op apartment. So what it means for them if the apartment has to go through probate. Can you let us know?

Sure. So probate means taking a will to surrogate court to get it validated, kind of put into effect and getting an executor appointed to the estate. If you don’t have a will, there’s a very similar process called administration.

But either way, it does tend to take a long time. So what do I mean by that? Six months, a year in downstate New York, where we have most of our co-ops, we have a backlog in these surrogate courts.

And the problem we have with co-ops is that the shares are personal property. They’re not real estate. So a tool like a transfer on death deed that will apply to a house or a condo, and allow it to pass outside of probate, is not something that we can use for a co-op.

Interesting. Okay, good to know

“What happens now during the probate?

Like, can you sell the apartment? Can you rent it out? What are the beneficiaries’ obligations as far as like having to pay the charges?

You know, how does that all work?

So you can’t sell the apartment until that executor is appointed. And that happens when the surrogate court issues what’s called letters testamentary or letters of administration. Until you get those magical letters, you’re not selling your apartment.”

“You’re also not renting out a co-op with a fresh lease. On the other hand, if there’s a tenant living there already, they have the same rights as other tenants, you know, in New York state and New York city. And you’re not, you know, barring the door on them either and locking them out.

They can continue living there.

Dalia, now let’s crack this open. You are my favorite real estate attorney. So if we want to avoid probate, what are the options there?

What can our shareholder do?

Yes, I do love to avoid probate for my clients. So I might advise that during your lifetime, in order to avoid probate, a good way to do that is that you put your beneficiary on the stock and lease and make them a joint ownership and make it joint ownership with rights of survivorship, right? So this is the most common and effective tool to get out of probate.

“So this way, when one owner dies, the surviving joint tenant automatically becomes the full owner, bypassing probate entirely. And sometimes at a real estate closing or at the transfer of a co-op, you’ll see there’s on leases or on titles, we can name joint owners with rights of survivorship, or we can also name them as tenants in common. Now, tenants in common is if one owner passes, their share goes to their heirs.

This is a way you will not avoid probate because now a share has gone to an heir and now we’re in probate. So with joint ownership, with rights of survivorship, we get to bypass that.

That’s amazing. And how does this work in practice? Could you give us an example for it?

Yeah, yeah, absolutely. I know sometimes it’s kind of, it’s a little hard to explain. And sometimes I have to explain at closing when people want to decide, how do I want to take title here?

How do we want to own this, right? So let’s say a couple owns this; a husband and a wife, or a couple partner and a partner own it, and one of them passes away? Okay, now the surviving partner starts thinking about legacy, right?

Maybe they have an adult child, and the current shareholder during their time, what they can do is gift a small percentage of their shares, let’s say 10% to that beneficiary. So they become joint tenants with rights of survivorship now as well. So when the shareholder passes away, the beneficiary automatically inherits the remaining 90%, also avoiding probate.

Okay, so let’s say you have a couple, one partner passes away, the surviving partner starts thinking about legacy. Let’s say they have one adult daughter. So now there’s a mother who owns 100% of the shares, and she’s wanting to pass that down to her daughter, but without probate.

So during her lifetime, she may gift, say, 10% of the shares to her daughter, the beneficiary. So now they become joint tenants with rights of survivorship. So when the shareholder passes away, the mother, the beneficiary, which is the daughter, automatically inherits the remaining 90%, avoiding probate altogether.”

“Orsolya, let me ask you. Now in my example, I gave the mother giving the daughter 10%. Why only 10%?

How does this relate to capital gains, taxes, how is that calculated, how does that all come into play when we’re talking about this sort of transfer of shares?

Thanks, Dalia, and it’s a great example. And I’m not going to answer this question by myself because it’s a very complex one. And again, any tax related questions should be discussed with your CPA.

But just to give you an insight why we are talking about gifting 10% to future beneficiaries or even less than 10% to future beneficiaries. So let me start explaining and I will pull both of you into this conversation because because I need your brains to answer this question very clearly. So in our example, let’s say that the mother decides to put the daughter on the stock and lease in 2025 and gifts the daughter 10% ownership on the stock and lease.”
“The daughter and the mother, neither of them will have to pay anything in 2025 because we are talking here about a gift. However, when the mother passes, let’s say in 10 years, in 20 years or 100 years, then the co-op’s apartment value will be significantly higher than at the time the gift was made. So the tax authorities and the tax obligation will be looking at capital gains tax basis, which will be the time of gifting and at the time of selling off the apartment.”

“Obviously, if the daughter decides to move into the apartment, into the co-op apartment and live out her life there, there won’t be any capital gains taxes because she will be at the time of the mother’s passing 100 percent owner of the apartment. But in case the daughter says, I don’t need my mother’s apartment and I would like to put it up on the market as soon as possible, then capital gains taxes will be the difference between she received the apartment as a gift, the 10 percent and the time she is selling. But the basis for the capital gains taxes will be only the 10 percent value that she received.

Because for the remaining 90 percent, there will be a so-called step up basis. Look at that. Bracha, help me.

Step up basis. What does that mean?”

“So a step up in basis means if you inherit the apartment. So let’s talk about that 90 percent that the daughter will be inheriting. Instead of the tax authorities looking back at 2025, when they’re comparing the value between the time of acquisition and the time of sale, they’re going to look at the date of death of the mother because that is when the transfer occurred.

So you said the mother dies in 2035. Let’s say the daughter sells the apartment in 2037. There really should not be, even in New York City, a tremendous amount of change in that small time, not enough to trigger capital gains tax, probably on that 90% at least.

Right. So basically what we want to do is, at the time the gifting is happening between the shareholder and the future beneficiary, you want to give the future beneficiary as little percentage as possible in order to avoid capital gains taxes in the future. What is critically important is that you want to avoid probate.”

“You do this whole process to avoid probate, and because of that, you just give a very small percentage to the future beneficiary. So that’s the key, and that’s the takeaway in terms of all this taxes, step-up basis and capital gains taxes.

These are things that it’s really good to know, because avoiding probate is going to save you money, save you time. Avoiding capital gains tax is also going to, you know, save you a lot of money, because that’s a really large percentage here in New York. So these are really small things that you can do with your attorney to avoid a lot of problems in the future.

So I think this topic is really important.”

“I’ll just note, Dalia, you see how we talked about this and how complex it is and how many factors you’re taking into consideration. This is, you know, cops, I understand, don’t have deeds, but similar, the stock and leases. It’s not as simple as, I’ll just put my child on the deed.

I’ll just put my child on the stock and leases. No, this is an entire analysis that should be done that looks at all the potential ramifications, including tax.

Yeah, absolutely.

Correct.

So now let’s turn into the practicalities. Dalia, how is this process? What does this whole process entail?

How do we put the beneficiary, the daughter on the stock and lease?

Okay. So this really all depends on the co-op, the management and the board. And so for every co-op, it’s going to be different.

If you’ve ever spoken to someone who lives in a co-op apartment building or two people, they have totally different experiences, right? You know, their board might be one way, their management might be another way. So it’s very dependent on that.”

“So when you buy or sell a co-op apartment in New York City, you don’t just hand over the keys, kind of like you would outside of the city, like in Long Island, where we just, you know, hand over keys, here’s the deed, here’s the keys. What really happens behind the scenes is a transfer application, right? Because we’re not selling real property, we’re selling shares.

So a transfer application is the, or we’re transferring shares. So transfer application is the formal submission that allows the co-op corporation to review and approve the transfer of ownership from one tenant to another, or in some cases, a rental or a refinance. So in a co-op, you aren’t buying real estate, you’re buying the shares in a co-op, in a corporation.

So the board has the legal right to approve or reject any new shareholders. And that approval process begins with this transfer application. And I know that Orsolya and I have another podcast somewhere in our history, where we go over that sort of transfer application process.”

“And it usually includes submitting financial statements, tax returns, reference letters, purchase contract, various disclosures. And all these things are reviewed by managing agents. And then by the board itself.

So you may also hear a second term called the sale application. Now these two often get used interchangeably, but there is a distinction. So the sales application refers specifically to the situation where somebody is selling their shares to a new purchaser, right?

So they’re moving out, they’ve got a real estate agent who’s found a brand new purchaser, and here we have a sale application. Okay? A transfer application is more broad.

It can also apply to sublets, gifting shares to a family member, like the example that I gave earlier, estate transfers or even refinancing your loan. Okay? So all these would be a transfer application.

You’re always going to have to go through the co-op, the board, the management to do these things. Anytime the board needs to approve a change involving the shares of the co-op or the proprietary lease. So while every single sale triggers a transfer application, it’s not the case in a transfer application.”
“And it usually includes submitting financial statements, tax returns, reference letters, purchase contract, various disclosures. And all these things are reviewed by managing agents. And then by the board itself.

So you may also hear a second term called the sale application. Now these two often get used interchangeably, but there is a distinction. So the sales application refers specifically to the situation where somebody is selling their shares to a new purchaser, right?

So they’re moving out, they’ve got a real estate agent who’s found a brand new purchaser, and here we have a sale application. Okay? A transfer application is more broad.

It can also apply to sublets, gifting shares to a family member, like the example that I gave earlier, estate transfers or even refinancing your loan. Okay? So all these would be a transfer application.

You’re always going to have to go through the co-op, the board, the management to do these things. Anytime the board needs to approve a change involving the shares of the co-op or the proprietary lease. So while every single sale triggers a transfer application, it’s not the case in a transfer application.”

“So the lender is securing the collateral, so the money that they gave against the stock and lease. So they sort of also have to approve that there is a new incoming person. But again, the good news is that the current shareholder will remain on the mortgage note.

So the lenders are usually favorable and approve the new incoming beneficiary, as we have been calling this new owner. So lenders are more favorable approving new owners. And it’s usually a smooth process.”
“The way it’s done, that you have to contact the current lender of the shareholder and request an application for a mortgage modification. A mortgage modification will require the new person who will be added to the stock and lease to provide a financial information, anything that’s required by the lender. Once that has been submitted and reviewed by the lender and the board approved the new shareholder to be added to the lease and stock, once you provide the board approval letter, then usually the mortgage modification is granted, and the stock and lease can be changed, and the new shareholder can be added as a joint tenant with rights of survivorship to the existing stock and lease.

So that’s the little curve ball that also needs to be done, in addition to be added to the stock and lease.”

“All right, sounds good, I mean, it’s definitely something that people want to consider. So Bracha, let me ask you, do you feel like this is a solution for everyone? I mean, you have a lot of experience seeing things that go into probate, and how to avoid that.

Have we covered it?

Can this go for everyone?

Well, my approach is always to look at specific family situations and tailor the planning. So this is really good for family, like the example you gave, where there is one child. That example had an adult daughter, right?

Because we don’t like leaving things outright to minors. We’re assuming that adult daughter isn’t receiving any government benefits that this outright inheritance would endanger. We’re assuming that adult daughter is going to have kind of common sense and the ability to hire a lawyer and a broker, and maybe not be a spendthrift and waste the proceeds from the sale.

Otherwise, we might want to look at a trust for somebody who is not fitting into this very specific box that I’m talking about.”

“Makes sense. Makes sense. And I guess if there’s other children to consider or situations where there could be like family disputes, then maybe there’s another way to go to, right?

Yeah. Well, when there’s more than one child, A, you have the potential for disputes, but B, you know, this is a nice planning technique, but it doesn’t do the same thing as a will usually does, which says, I have child A and child B, but if either of them pass before me, I want their share to go to their kids. This doesn’t do that.

If one of your children passes before you and you have two kids on the release, it’s just going to go to the surviving child, and that’s not the outcome most people want.

That’s a really good example, Bracha.

Thank you.

Orsolya, how long does this process usually take and what does it cost?

Okay.

Approximately. I know you’re not going to give us any real numbers, but what’s involved here? Okay.

The process might be daunting, but believe me, it’s done very often. So here is an answer to your question in terms of timeline. It depends how quickly your management, your call board, how quickly they are responding to any kind of requests.

Some call boards are faster, some others are slower. I would say the moment you submit an application for a transfer of ownership or modification on your stock and lease, once you submit that application, usually management takes two weeks to review, then another four to six weeks, still the board reviews it, conducts the interview with the incoming new shareholder. So about six, seven weeks, six to eight weeks, let’s put it at six to eight weeks.”

“At the same time, you can simultaneously run the process with the existing lender, which process should not prolong the six to eight weeks. But again, these are timelines given to you as an estimate, and it very much depends on the building board and management. In terms of costs, for example, many real estate attorneys will be working on a flat rate, because we understand the process, we know how to run the process.

But in addition to that, there will be very often, not always, application fees with your co-op board, the same as a sales application, which might be a couple of hundred dollars, again, as much as the board is charging. There might be some fees involved if there is a lender. Obviously, if there is no lender, then there are no fees.”

“Again, think about application, although it’s just a modification of the mortgage modification. Again, there might be some fees, which are going at the end, add up. But at the end of the day, you will save a significant amount of money because going through probate may cost just as much or even more than adding someone on the lease.

But you definitely save time.

Sounds good. Well, I hope that this episode was helpful to all our listeners. We thank you so much for listening and joining us.

And we also thank our special guest today, Bracha Etengoff. And like I said, her information will be on the website. And so always reach out, leave a comment if you have any questions.

And we thank you so much again. We’ll see you next time on the next episode of Rock the Closing.

Thank you for tuning in to Rock the Closing. This podcast is hosted by real estate attorneys who offer valuable insights. Please remember that the content is for educational purposes only and does not constitute legal advice.”

“Always consult a qualified professional before making any decisions. This podcast is copyrighted by Rock the Closing, and any reproduction, syndication, or rebroadcasting of the content requires written permission.”

The post Episode 24: How to Avoid Probate In Case of Co-Op Apartment Ownership appeared first on Law & Mediation Office of Bracha Etengoff.

A lot of people think, “A trust – why is that something that I would need? I am not an extremely wealthy person. There’s nothing fancy about me.”

But even if you have only $5,000, your five-year-old cannot manage $5,000 by herself. She can’t manage $5, or $5,000, or $500,000, or $5 million. It really doesn’t matter – she’s five.

So as soon as you have a minor child, for example, you do need a trust.

How we draft it, whether we put it in the will or you need a separate document – that’s something you can discuss with your attorney. But you shouldn’t leave anything outright to a child.

Instead, somebody needs to be in an arrangement where they’re managing the asset for that child – for that beneficiary. And that’s exactly what a trust is.

And in terms of life insurance, that’s a time where ordinary people find themselves in a situation where estate tax actually might apply to them.

I have found that when I ask clients about their assets, many times what gets forgotten is life insurance. And people will ask me, is that an asset? And I’ll say yes, indeed it is. And that may be the one that you’re not thinking of, but we have to especially plan for it.

So in one case, I had a lovely young couple. They owned an apartment. They had a second one in another country. They both had good jobs. The apartments were going to appreciate – this is New York, and the one in a foreign country was in a desirable location as well. They also had some bank accounts.

But it was still not enough money for me to say, “Right now, you need a complex estate plan, you need a trust.”

Then she got pregnant – mazel tov, really wonderful. Our whole planning changed, which is fine.

But then she bought four million dollars in life insurance. So once we have a number like that, then I’m looking at the value of the apartments, and I’m looking at their income and how I expected hers at least to increase over the years.

And then I said to myself, here’s the threshold at which an estate gets taxed in New York – at that point, close to six million.

Once you’ve got four million in life insurance, does it help you now in your life? No, but she and her husband had purchased that so if neither of them are there anymore, there would be money to raise the child. Of course, that is why everyone buys it.

And what I can do to help is put that life insurance in a special trust – in a way that takes it out of the value of the estate completely.

So now a trust owns that life insurance policy instead of my clients directly.

And the trustees – the people who are going to make decisions about those life insurance policies – those are people who are separate from my clients: a sister and a brother.

So this is actually another illustration of why working with an attorney closely is so important, and why choosing someone who’s going to follow up is very important.

Because I worked closely with the with the insurance agent to make sure that the policies were now retitled in the name of the trust – which they did not do right the first time.

I always say, you don’t want to be your doctor or your lawyer’s interesting case.

We don’t want to get to the other end of things and find that the life insurance policy wasn’t quite titled properly in the trust, and have the IRS say, “Well, we don’t really think you should get the tax benefits,” and have a little fight.

And that would be really interesting to me! But that is not what we’re here for. We are here to make things smooth for our clients. And I don’t want any of my “interesting cases” to be ones that I planned.

So that’s one example of a trust. It’s often this legal arrangement whereby the person who’s benefiting is not the same person as the person who’s managing the assets.

The life insurance trust here is an example of one of the purposes of a trust, and that’s tax savings. That saved the estate from being subject to estate tax.

There are other purposes, and different kinds of trusts offer different kinds of protection and benefits, but also different kinds of limitations.

A trust may offer asset protection – it may be able to shield your assets from creditors. But it may not.

Certainly a trust is the most complex document we’ve talked about here. Please don’t download and sign anything online.

The other most important value of a trust to many people is that it can streamline the distribution of assets.

In New York State, we have tremendous backlog downstate for probate.

So remember, that’s the process by which someone takes the will after someone passes and files it in court. You need to prepare a petition, and that comes along with waivers from different family members. And that does take some time for even the best lawyer to gather all the required documents, get you to sign and notarize, get it filed properly.

Unfortunately, now the situation in downstate New York is even once we do that, the court may not do anything for six months. In a case in the Bronx recently – for a year.

It just sat there. And during that time, nothing could be done about the house that needs to pass through the will. So the house can’t be sold. The property taxes need to be paid. If the market was good, we might be missing the market. New York real estate, we turn on a dime here – you want to be nimble, you want to be able to catch the market. So what’s the alternative?

The alternative is to put the house in a form of trust called a “revocable trust,” meaning it can be revoked, it can be changed.

But that trust is a separate entity. It is now holding the house in a way that lets it pass to the next generation, to whoever the beneficiaries are, totally separate from whatever process is going on in court.

So if you’ve appointed a trustee who will take care of that house after you pass, that trustee can step right into your shoes. That trustee can make nimble decisions about when is the right time to sell.

And that is just not something that we can offer clients through wills anymore. And there are so many attorneys like myself who don’t believe in overcomplicating things.

But I also don’t believe in not showing clients the full range of options. And I believe that plans do need to be as complex as is beneficial for the client.

So this is actually not a very complex estate plan or an expensive estate plan necessarily. It’s something that Dalia and Orsolya and myself would love to combine our expertise, to offer clients at a really affordable price point. It’s something that we’re all very passionate about.

Because of our joint expertise, how can we do this for you in a way that you’ll be able to access and your family will be able to benefit from for the next generation?

A couple other types of trusts here that we’ll just go over quickly:

This is unfortunately confusing because the alternative to a revocable living trust is an irrevocable trust, which means the opposite. It cannot be changed.

And this is the type of trust where you start seeing tax benefits. This is the type of trust that a life insurance trust that I talked about earlier fits into. And this is where you’re going to find your Medicaid trust.

People say, “I need a trust to qualify me for Medicaid.” That works because you’ve made an irrevocable transfer of your house into it. Usually you retain the right to live there during your lifetime, but that house has actually been transferred.

We consider all the different types of taxes, the implications that may have on the capital gains tax, the estate tax – these are very complex decisions. And when it’s irrevocable, as you might imagine, it’s even more important to make the right decision the first time, because you’ve now done something that cannot be changed.

You might have heard of a special needs trust, and that’s something that we have to do often for persons with disabilities so that they can continue to qualify for government benefits while we provide separate funds – private funds from the family for basically everything that the government benefits will not provide.

So we don’t interfere. We say, these funds can only be used for things that the government benefits won’t pay for. And then the government looks at it and says, okay, you’re not giving us any resources for what we would pay for. And therefore, we’ll keep paying. That’s the general idea.

I wish it didn’t have to be so complicated, honestly. I wish that the benefits could just be given to the people in need, and we did not have to play this game, but you do. So for persons with disabilities, it’s important that we have this mechanism.

I think I’ve covered the ones that apply to most people. Most people don’t really have the sorts of estates where they’re setting up their own charitable trust. There are pet trusts – as a proud pet parent of a cat, I could talk about that one forever. That is a separate webinar!

So we’ve reached the end here, and I do want to invite people to submit questions, comments – anything that we could use the remaining time for, in a way that would most benefit you.

The post Trusts: Alternatives or Additions to a Will appeared first on Law & Mediation Office of Bracha Etengoff.

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Transcript of our discussion:

Dalia: Hello, and welcome to another episode of Rock the Closing. Today is a very special episode. We are super excited to welcome another guest today – Bracha Etengoff. She is a trusts and estates attorney in New York City and Long Island. She does mediation of estate disputes too. And she’s going to be talking to us a little bit about how real estate and trusts and estate come together, how they can relate, how they can intersect, what some issues might be, problems, benefits, all the things.

So we’re very excited to have her. We will be posting her information on the website. Look out for that. And her website is һ��ݹ���

Orsolya: I am very excited, Bracha! Welcome to our show, and I think that you will have so much important information for our listeners. So what happens to the real estate when someone passes away?

Bracha: Thank you so much for having me, it’s a pleasure to be here. And I’d be happy to try to shed some light on this mysterious process. We can help people understand what happens, and the control that they have to make sure what they want to happen, happens – instead of just some default.
So what happens to real estate when someone passes, along with all their other possessions, is dependent on what plans they made during their life for their distribution.

Dalia: So that would be if somebody had thought ahead and planned ahead. But I feel like a lot of people are in this situation when they don’t have a plan, or they haven’t gotten around to putting it down on paper. Well, what happens then?

Bracha: In that case, the law has a default plan, and it might match your wishes – or it might not. But the law says, there has to be some rule about what happens if you didn’t tell us what you wanted. And here’s the way it often works. Say someone is married, with a wife and two children.

What the law will presume is that in most relationships, you would want your possessions to be divided between your spouse and your children. We also presume that you’d want your children’s share to be divided equally among them. So the law says all right, the first $50,000 in your estate goes to your wife.

After that, everything is divided half to your wife, half to your children. Now, the half that your children inherit, each one gets an equal share. So what ends up happening is: half to the wife, a quarter to your first child, and a quarter to your second child. That adds up to the whole of your estate.

Orsolya: But as I think all of us know, life is never so straightforward and people may want to make a decision that is not what the law prescribes. So could someone decide differently about the estate by writing a will? What could you achieve with the will, when it comes to real estate?

Bracha: The one thing to keep in mind – and this is something you would have to discuss with your estate planning attorney – is in New York and actually in all states in the nation, spouses do have inheritance rights. Your estate plan needs to either account for that, or you can have your spouse waive their rights. But I’m not going to tell you that you could do absolutely anything you want.

So leaving that aside, say you want to actually give everything to your spouse, because your children are 7 and 10 years old, and they won’t be able to manage their own money if they inherit it. At 7 and 10 years old, the court is going to say: We need to appoint someone to manage that money for them, and you can only access it with our oversight. And they’ll get it straight out when they turn 18.

There is really no 18-year-old who should be inheriting $1,000,000 – or even $100,000 – with no strings attached. You’re just not old enough to be able to make wise financial decisions on your own.

So often people say: “My spouse is also the mother of my two children. I’m confident that they will take care of my children, so I’d rather have everything go to my spouse.”

On the other hand, some people stay married for various reasons. Even if they’re not living together, even if the relationship has concluded, sometimes people stay married for another 10, 15, 20 years. For example, maybe you need your spouse’s health insurance, or maybe you don’t believe in divorce.

There could be any number of reasons you don’t want what is dictated to you in the statute to be the inheritance structure.

Dalia: Wow, that’s really interesting that you say that, because in my past life as a divorce attorney, I have met a lot of clients who stayed legally married to their spouse for many, many years after the relationship had basically ended. And I know for a fact they would have been really upset if they had passed, and their property and assets had passed to that spouse.

So it’s great to have a plan for each season of your life, because things change.

You definitely don’t want to work your whole life, then have what you worked so hard for not be distributed in the way you want.

I also get a lot of questions about putting property in a trust. I think a lot of times people don’t really understand what that is or how it works. So can you shed any light on what the benefit would be of including property in a trust?

Bracha: One incredible benefit of keeping property in a trust instead of passing it simply through your will is that the trustee – the person who you name to be in charge of the property in your trust – you can name someone to do that after you pass. So typically, people will often retain the power for themselves to act as trustee and manage all their property during their own lifetimes. But once they pass the “successor trustee” can take over.

So let’s compare a couple of situations. Say you put your house in a trust and upon your passing the trustee can say: “The market’s really good right now. I would like to be able to sell this house sooner rather than later so that my family can get the full benefit of their inheritance.” Or, “I don’t want to hold onto this property because none of us really want to live there.” For example, if one of the trustees is a child, and you’ve got a number of children who live in different parts of the country. And nobody wants to live in this family home they grew up in.

The longer you have to hold on to that house, the more your inheritance is frittered away.
Because for every day, every month, every year that you can’t sell that house, you are liable to keep paying for its utilities. And for the property taxes.

And the amount of money that you may be able to sell your house for now versus next year could be hundreds of thousands of dollars different, depending on what happens in the market.

Is it a seller’s market? Maybe now it is, but next year you’re going to get $200,000 less for this house because it hasn’t been able to be sold.
But if the house is in a trust instead, you can sell that house pretty much immediately.

Dalia: Wow. That’s really good information, because I feel like a lot of people just have this obscure idea of how a trust works or what’s involved, and they don’t have the real clear picture. So thank you for that.

Bracha: You have a trust that is separate from a will, it’s a separate way of owning property. Then you don’t have to wait for the courts to appoint someone under the will with authority to sell the house.

That house is happy living its own little separate life in that trust – far away from the courts, far away from waiting for the court to approve your will.

Dalia: It’s great to have to be able to have that control, to be able to manage your own property like that. So there is more than one kind of trust. Can you shed some light on that too?

Bracha: So usually we divide trusts into revocable and irrevocable trusts.

With a revocable trust, you can retain as much control as if you owned the property in your own name.

So typically, if you have a married couple, they will own that house together in the trust, the same way they would have both been on the deed in their personal names, and they may both be acting as trustees during their lifetime. They can do whatever they want with their house in that trust, the same way that they could do whatever they wanted if that house was in their personal names.
That’s usually what we use revocable trusts for – complete flexibility.

But an irrevocable trust means you have transferred ownership to someone else in an irrevocable manner, meaning it cannot be taken back.

You’ve made a permanent transfer, so it no longer mainly belongs to you, but you might be able to retain something like a life estate. Perhaps you would like to explain that to your listeners.

Dalia: Absolutely.

If you’re retaining a life estate in your property that’s in an irrevocable trust, then you are basically promised to be able to live there for the rest of your life.

Kind of like a lease that doesn’t run out until you pass away. So that’s a good way to make sure that you have the protections of a trust, but also the security that you won’t be booted from your house that you’ve put in this trust if the trustee is someone else. And so you at least have that ability to stay there.

Bracha: And often these are used for Medicaid planning purposes. Because even if Medicaid is going to let you keep your residence, after the person on Medicaid passes, the state may try to recover the money that they have expended for their care. And the state could put a lien against the house.

If this property is instead transferred to a Medicaid Trust, the house actually didn’t belong to that person on Medicaid anymore during their lifetime. It belonged to the children, and the person on Medicaid simply retained a life estate – a right to live there during their lifetime.

And this is not a simple concept, and it also is not something that should be done without a full consultation with a qualified attorney so that you can look out for the different tax consequences and really make the best decision for you.

Dalia: I know a lot of people have that concern when they own a house. As they get older, what’s going to happen to that house when they need medical attention or if they’re going into a home?

Orsolya: I’m just listening here and learning so much from you. There are so many considerations. And you mentioned something before which comes up very often in real estate transaction. And I’m talking about capital gains tax. Very often a young couple purchases a home, and they spend decades in that home. And then, as we know, in New York the market is really growing. Or perhaps you invested in a home 40 years ago, and then the price went so far up with the market changing that you might be exposed to capital gains tax.

Capital gains are the difference between the selling and the purchase price. When there is a huge surge in the market price for certain property, or when a family has owned the property for an extended amount of time, then we have to look into capital gains tax.

Then we do have to report that, and if capital gains taxes are due, the seller will have to pay a certain amount to the tax authorities. Would capital gains tax also be something that will apply if the buyers are putting the property in a trust?

Bracha: I’m going to continue to focus on what happens if your children receive that house after your passing. Depending on the plan that you’ve made, what could be the implications on capital gains taxes?

When someone inherits real property, they receive a benefit called the step up in basis when calculating capital gains taxes.

Say you’ve got a townhouse that was purchased in 1970 for $100,000 and today it’s worth three and a half million. Now, if you inherit this, then you receive the step up in basis. Instead of paying the difference between $100,000 and three and a half million dollars, instead of that being the basis of the calculation for whether you gained or lost money from this sale, the difference is calculated from the date of the person who passed.

So say the person passed when the house was worth 3.4 million. By the time you got around to selling it, it’s worth 3.6 million. Then the capital gains tax is calculated only on that $200,000 difference.
And that’s true if the property passed without a will, or through a will, or through a revocable trust.

Because remember, a revocable trust will allow you to retain total control during your lifetime. So it’s as if it was still owned by the person who passed in their own name. It is treated the same for the purposes of capital gains tax as well.

However, if that property had been transferred into an irrevocable trust such as a Medicaid trust, it is looked at as a gift made during their lifetime – not as an inheritance. And when you calculate capital gains tax, you are going to be responsible for the differential between $100,000 and $3.6 million.

I receive calls like, “Can you just put my son on the deed? I don’t want the house to go through probate.”
And that would have the same problem for capital gains taxes.
Because when people call me like that, I ask them: “What did you buy it for?
And they say things like: “$100,000 back in 1980.”
And I ask: “What is it worth now?”
And they say: “Oh, about a million.”

If their son would inherit that home, they would have the benefit of the step up in basis. And only pay the difference between $1,000,000 and what it sells for.

But if you put someone on the deed, then you are – without really thinking about it – creating a situation where half the transfer is done during their lifetime.

The main point is – don’t make a decision like this just because a friend put their kid on the deed, or you heard that probate is something to avoid, or that a Medicaid trust is a good idea.

The way to make decisions like this is to consult someone who can guide you through the process and help you figure out, based on your circumstances, what’s best for you.

Maybe if you just bought the house yesterday, you don’t care as much, right? You bought the house yesterday. It was worth $700,000. And you expect that maybe when you pass, it’ll be worth $800,000. That’s a different calculation than our house in 1970 that was purchased for $100,000.

Dalia: Yeah, I get a lot of calls for people wanting to add someone to a deed or just change things up. They definitely think it’s like a one and done, quick thing that just needs to be filed with the clerk’s office. But there’s all these consequences, like Bracha just told us.
So what advice would you give for a first time buyer who asks:
“What should I do? Should I put this in my and my spouse’s name? Should we buy this in a trust? Should we buy it first and put it in a trust? Do we need a trust?”

Bracha: If you consult a trusts & estates attorney from the outset, you will be in a much better place – rather than you just want to get to the closing, you just want to buy the house, you’ll worry about it later. But it’s hard for later to actually happen.

Once you’re busy with your closing, packing, and moving – to later find another lawyer, and set up a trust, and transfer the house into a trust – that really may not get done at all.

And the other problem is, you’re going to have to pay title company fees and legal fees again.

Title company fees could be about $600. And you’re going to probably end up paying a thousand at least in legal fees, possibly a couple of thousand, because somebody has to trace back and look at:

• What kind of ownership is this?
• Did you buy it with your spouse or with someone else?
• What happened here and what kind of trust do I need to create?
• Do you want to carry through that form of ownership or change that form of ownership?

If you’ve identified a property that you want to buy, you can have your trusts and estates attorney work closely with your real estate attorney – you are much better off setting up a trust right then.

Your trusts and estates attorney can counsel you on which kind of trust is right for you.

And then you make sure that the property is actually put into the trust. Because it is not unusual for people to set up fancy trusts – but never actually put the property in them.

And unfortunately, that can even happen when lawyers do it, because it’s the kind of detail that sometimes gets forgotten. Unfortunately, we do see cases often when trusts have been set up for clients, and when someone passes, they come to our office and we check the deed. And the deed says that the house is still in the person’s personal name – it never made it into the trust.

So if you can have your players communicate with each other – your trusts and estates attorney and your real estate attorney – you’re usually going to get a better result.

You’re going to make sure it gets done, and you’re going to make sure it gets done right.

Orsolya: Bracha, thank you so much for this very interesting insight. I really enjoyed talking with you and receiving all this information that intersects with real estate. I would like to encourage all who listen to our podcast today that if you have any further questions, please feel free to reach out to Bracha. Her website is brachalaw.com
Both Dalia and myself are working with Bracha very closely. If you need a real estate attorney, rest assured that we can involve Bracha to give you more options, and vice versa.
So again, real estate attorneys and trusts and estates attorneys are often working together. And this is something that should be your final take away when you embark on a real estate transaction in your life.
Once again, thank you so much for chiming in for today’s Rock The Closing. I hope to see you in our next episode!

Dalia: Thank you for tuning in to Rock The Closing. This podcast is hosted by real estate attorneys who offer valuable insights. Please remember that the content is for educational purposes only and does not constitute legal advice. Always consult a qualified professional before making any decision. This podcast is copyrighted by Rock the Closing and any reproduction, syndication or rebroadcasting of the content requires written permission.

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The post Rock the Closing! Episode 17 Chat with a Trust & Estate Attorney: Highlights appeared first on Law & Mediation Office of Bracha Etengoff.