Real Estate Can Make a Challenging Gift

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A colleague asked about handling a will with a clause saying to “pay or transfer” a piece of real estate to a charity. This sounds quite straightforward but raises some complications about whether the executor could just sell the property and give the proceeds to the charity. I am guessing the person who made this bequest in the will didn’t think of the questions this would raise, and just wanted to give their home to a charity they believed in. Another colleague said he would need to see the rest of the will to see if there were any general provisions in the will for administrative powers that might be relevant to this.

A provision like this can make things really difficult for an executor.

There are a number of questions to be worked through by an executor, such as what to do if the house has a mortgage on it. Would the charity get the house AND the mortgage? Would your view on this change if it was a small mortgage or a large mortgage? What if the mortgage was bigger than the rest of assets of the estate?

If a property is a principal residence it has the benefit of being free of capital gains taxes. Things are trickier if it is an investment property which would be subject to greater taxes. Your estate would be liable to pay those taxes, not the beneficiary getting the property.

When drafting a will you really need to think about these things. Is the estate in a position to cover all those taxes and be able to give the property away? Would your estate 50 years into the future be able to do that? What if you sell the property 10 years before you die? Does the gift lapse or does the charity get a gift of the same value as the property when you sold it? What if you have the property clear title now as you are writing your will but you borrow against it and have a mortgage on it when you die? (generally the rule is that the beneficiary assumes the mortgage as part of the bequest, receiving BOTH the property AND the mortgage registered on it), but this could change depending on what other clauses are in the will). The giving of the property is a generous thing to do, but it can raise issues for the recipient, who may not be able to qualify to take over the new mortgage, and who may run into problems paying the mortgage and the other costs that come along with property ownership.

You have to be very, very careful when drafting a will and think through all these potential issues so you don’t leave your poor trustee in a battle with a beneficiary about exactly what you meant to do when you gave them a specific bequest for a property. You won’t be there to clarify what it was that you meant for them to do. You will make things so much easier for your executor if you simply give a percentage of the remaining assets to your beneficiaries and allow the executor to sell everything off.  And as for that question, the colleague is still trying to figure out what to do.

 

Michelle

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