I’ve been teaching attorneys, CPAs and Realtors for the past 12 years that title to real estate should never be owned by individuals. Why?
- When an individual owns real estate the Probate Court must determine who will become the beneficiary when the individual dies. This probate cost is approximately 5% of the fair market value of the real estate.
- If the individual has a lawsuit, bankruptcy or IRS problem, the creditors have a right to the real estate.
- If the indivuals loses his/her mental capacity due to an accident or dementia, the Guardianship Court takes jurisdiction of the real estate. This cost is often more than the cost of probate and continues year after year until the person dies.
- If the individual gets married, the real estate usually becomes Community Property.
- If the individual has children then upon death, the property belongs to the step-partent and the children are accidently disinherited.
- If the individual gets a divorce, the real estate must be shared with the ex-spouse.
- If the spouse has a lawsuit, bankruptcy or IRS problem then the creditor can seize to the real estate.
- If the individual has an estate tax issue, there is no tax planning that can be done if the real estate is left in their name.
- If the real estate is owned jointly by 2 or more individuals, the above problems only increase (or in the case of probate, the eventual fees are only delayed not avoided).
How do I reconcile this post with my prior post? A rule such as “Humans Should Never Own Real Estate” is a general rule. There are exceptions, and one of those exceptions is when a person is going to own an investment property but they don’t want to pay a qualified attorney to prepare it properly. In those situations (in my opinion), a person is better off holding the real estate in the trust and foregoing the forming of the LLC.