Regaining Control in a Down Market
Real estate ownership is a long-term proposition. Owners intend that the values of their holdings steadily rise over the years, increasing their equity. As with any long-term proposition, there will be periods where the market is declining. As the real estate market softens, we are flooded with media reports about the price “bubble” and other such negative stories. Should you be worried?
If your circumstances require selling now, the statistics suggest that it will take longer than in the past. Sales have declined, and the prices are more negotiable than they have been in over a decade. While we cannot control market prices, we can control the timing of our sales and purchases.
In times of economic uncertainty, it is human nature to take a wait and see attitude. Rather than making any financial commitments, we tend to take no actions until we have confidence that we know how things will turn out. The conventional wisdom is to “wait out the storm” until we feel things are safe again.
While you own real estate, there are actions you should take to protect a far greater percentage of your equity than that affected by current market conditions. The question that you want to ask yourself is: Have you done everything you can to protect the equity in your real estate holdings? Consider that there are non-market forces that can erode your equity in far greater volume than the economy. Can you afford to stand by and let that happen?
When a person passes away, the equity in their real estate is subject to erosion from both federal estate taxes and the court costs of estate administration. The federal government imposes a tax of 45% on the fair market value of all assets above $2,000,000.00. California generally requires court supervised probate proceedings on all estates with a gross value above $100,000.00. Between executor’s and attorneys’ fees, the filing fees and other costs associated with probate, the cost of administering a parcel of real estate worth $1,000,000.00 can be close to $50,000.00 or 5% of the gross value.
You can take control of these losses to your estate by creating a trust and transferring your real estate holdings into the trust. By doing this, you can avoid court involvement, including probate costs. Assets held in trust do not require court proceedings, and therefore your estate saves the costs associated with courts and lawyers.
Married couples who create a properly structured trust can preserve both of their estate tax exemptions such that they can transfer assets with a net value of up to $4,000,000.00 without any probate taxes. Since the federal estate tax rate is 45%, married couples who do not take advantage of family trusts face the loss of over 22% of real estate equity to federal estate taxes. Creating a trust operates as single premium insurance against the loss of your equity from both court costs and estate taxes. Once the trust is created, there are no annual premiums or costs in maintaining the trust.
Single individuals can also use trusts to take full advantage of the strategies to minimize estate taxes, transfer property subject to the least amount of capital gains taxes, and avoid reappraisals for property taxes. Without proper planning, it is a certainty that the value of the estate will decline from court costs and taxes. As a result, the beneficiaries will be receiving less value from their inheritance. Given these consequences, can you afford to wait until the economy improves before planning for the transfer of your estate?
This wait and see logic about getting your estate plan completed is akin to deferring any maintenance on your real estate until you feel that the market is going up. Your holdings need to be maintained and cared for regardless of how the market is doing. Otherwise you will be losing the full value of your property. Likewise, your estate planning needs to be in place to make sure that you get the full benefit of wealth transfers without minimum costs of taxes and administration.
You cannot control the real estate market. You can, however, control the certain losses from estate taxes and court costs. Be proactive. Rather than waiting for the other shoe to drop, take control now by creating a trust that works for both you and your family and protects against the certain losses associated with the transfer of your estate.
