Passing a house to heirs can be complicated whether it is a vacation home or a primary residence.
For many homeowners, their personal residence is one of their most significant assets.
In addition to its monetary value, the family home or vacation home also holds memories.
There may be a lot of laughter in the walls.
Because this asset is both illiquid and deeply personal, determining what to do with it when you die can be a challenge.
According to a recent USA Today article titled “How estate planning can help you pass down a house to your kids and give them a financial leg up,” each option available for transferring a home has unique considerations.
How might choosing each of the estate planning options impact your loved ones and your estate?
Gifting the property to children.
Although you can certainly gift a home or other real estate to your children directly, this can trigger unintended tax consequences.
When you sell or gift such property while you are alive, there can be a significant capital gains tax bill upon later sale because the value of the property increased.
Consequently, gifting with warm hands means gifting a carry0ver basis, too.
If you wait until you die, the property will received a step-up in basis and void potential capital gains taxes.
Instead of gifting properties to your heirs directly, you could place them in a revocable trust.
This is can be especially beneficial for those with rental properties.
It allows the trustee to liquidate the rental property after it becomes vacant and provide income for the heirs.
If you have asset protection concerns, then you might want to transfer your rental property into an LLC and transfer the LLC into your revocable trust.
Asset protection and probate avoidance.
Bequeathing real estate to heirs.
Most people who choose to gift a house to children after they die choose to do so with a last will and testament.
The parents still own and benefit from the home while they are alive and the property receives a step-up in basis in value when they die.
If keeping the home out of probate is a priority, placing the house in a revocable trust can accomplish this while also saving on estate taxes.
Within the trust, you can provide instructions for the management of the property and how heirs get the house.
If only one child wants the home, you can stipulate the shares of the other children must be purchased from them.
Simply adding the children to the title of the home could lead to conflict.
If one child wants to live in the home and the others would like to sell the home, then they will be at a stalemate because one cannot act without the approval of the others.
With a revocable trust, this can be avoided.
In Kansas and Missouri, you can leave your home without probate at death via a transfer on death deed in Kansas or a beneficiary deed in Missouri.
Selling the home to the children.
Some homeowners find themselves no longer able to manage and maintain their personal residence.
In cases like these, parents may choose to sell their personal residence to an adult child.
Although it sounds simple, there are elements to carefully consider.
The agreement and its consequences must be discussed.
One option is to deed the personal residence for the child to refinance and cash out the parents.
If selling their home, parents should think twice before selling at a value below market.
First, the amount of the sale below fair market value is a gift and, second, this “sweetheart” deal can leave the parents with little beyond Social Security for retirement income.
When selling a home, property taxes and capital gains taxes should also be discussed.
Working with an experienced estate planning attorney can help you to determine what option for transferring your personal works best for you and your heirs.
Reference: USA Today (Dec. 7, 2021) “How estate planning can help you pass down a house to your kids and give them a financial leg up”