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 officially appointed to this post, and once that happens, the executor 1
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 “ a dministration of an estate” . i. Administration of an estate arises if the deceased did not leave a will, or 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. 2
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. 3
4) A release of lien can't be processed until the estate's outstanding 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 IRS Estate Tax Lien – must be paid off, if any. i. If there is no taxable estate for federal estate tax purposes, you can’t ii. 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 on 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 on 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. 4
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: Testamentary – A trust created upon death, under provisions of a will i. 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 Inter Vivos – A trust created while the grantor is still alive. ii. 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’ credit ors 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 5
Recommend
More recommend
