I wanted to discuss briefly estate planning for income-restricted properties. “Income restricted properties” is real estate whose owners’ income is below the community’s maximum allowed income. It a form of “affordable housing.” The confusion frequently arises when trying to plan for the affordable house’s occupant’s death, and the subsequent transfer of the property to their heirs.
Issue No. 1: Who is going to inherit?
These properties come with multiple restrictions, one of which being that ALL owners at all times must meet the income requirements. This means that in order to actually become owners, the heirs of the current owners must also meet the income restrictions. But frequently, they make too much money to qualify for ownership of one of these properties.
What that means in practice is that the owner of an affordable housing unit can still bequest the property to their heirs, but if they do not qualify, they would be forced to sell to someone who does, and would inherit the proceeds from the sale instead of the actual physical property.
Issue No. 2: How to transfer at death?
The second issue arises with the actual physical act of transfer. As these affordable housing units are still “real estate,” they must be transferred through a probate process, or through a revocable living trust. Here’s an outline of the issue:
– The family wants to avoid probate, to avoid paying the really high statutory fees to executor and the probate attorney.
– In most situations, in order to successfully avoid probate, the property must be in a revocable living trust, which requires an actual transfer from the original purchaser of the property, to him or herself as trustee of his or her revocable living trust.
– Most of the affordable housing purchase agreements prohibit any and all transfers of title, as to ensure that all owners meet their income restrictions.
In reality, the transfer to a revocable living trust is not a “real” transfer because for all but probate court purposes, the “owner” actually remains the same – the original purchaser that purchased the property after meeting the income restrictions. However, unfortunately, some regulatory agencies do not realize this, and try to treat a revocable trust transfer as a “real” transfer, as if the owner actually sold the property to an unrelated 3rd party that doesn’t actually meet the income restrictions.
The good news is that the problem of transferability to a revocable trust is actually not a problem, but a mere misunderstanding, which is overcome with patience and some information. I would be more than happy to help.
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