
Rock the Closing! Episode 17 Chat with a Trust & Estate Attorney: Highlights

Hosts: Dalia Zaza, Esq. & Orsolya Bartha, Esq.
Guest: Bracha Etengoff, Esq.
Link to
I had the opportunity to join the ladies at Rock the Closing podcast where we discussed how to use a trust when buying real estate. I hope you find it useful.
Main points:
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 鈥 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 鈥 but never actually put the property in them.
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 鈥 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 一起草官网
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鈥檚 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 鈥 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 鈥 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鈥檚 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 鈥 and this is something you would have to discuss with your estate planning attorney 鈥 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鈥檒l get it straight out when they turn 18.
There is really no 18-year-old who should be inheriting $1,000,000 鈥 or even $100,000 鈥 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: 鈥淢y spouse is also the mother of my two children. I’m confident that they will take care of my children, so I鈥檇 rather have everything go to my spouse.鈥
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 鈥 the person who you name to be in charge of the property in your trust 鈥 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 鈥渟uccessor trustee鈥 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: 鈥淭he 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.鈥 Or, 鈥淚 don’t want to hold onto this property because none of us really want to live there.鈥 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鈥檚 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 鈥 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 鈥 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 鈥 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鈥檚 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 鈥 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, 鈥淐an you just put my son on the deed? I don’t want the house to go through probate.鈥
And that would have the same problem for capital gains taxes.
Because when people call me like that, I ask them: 鈥淲hat did you buy it for?
And they say things like: 鈥$100,000 back in 1980.鈥
And I ask: 鈥淲hat is it worth now?鈥
And they say: 鈥淥h, about a million.鈥
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 鈥 don鈥檛 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:
鈥淲hat 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?鈥
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鈥檒l worry about it later. But it鈥檚 hard for later to actually happen.
Once you鈥檙e busy with your closing, packing, and moving 鈥 to later find another lawyer, and set up a trust, and transfer the house into a trust 鈥 that really may not get done at all.
And the other problem is, you鈥檙e 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 鈥 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 鈥 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 鈥 it never made it into the trust.
So if you can have your players communicate with each other 鈥 your trusts and estates attorney and your real estate attorney 鈥 you鈥檙e 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.