At the core of many families is the family home, the place of gatherings and celebrations. To ensure it continues to be filled with love and laughter for generations to come, you’d like to pass down the home to your children. We’ve outlined a few ways to transfer your real property, and perhaps most valuable assets, to loved ones.
It’s natural for you to want to pass along the family home to your children. However, you need to think about the situational impact and requirements placed upon your beneficiaries; such as, do your children (or child) want to live in their childhood home, do they have the financial means to maintain the property, and do they have the ability to cover all applicable inheritance taxes upon transfer of ownership? Also, if you have multiple beneficiaries, how are they supposed to co-own and manage the property together? All of these questions should be addressed in your estate plan; which can be uploaded and safeguarded in your HereToday Vault.
Talk to Your Family
Before making any decisions, we recommend you speak with your family about the property; specifically, 1) what are their inheritance expectations and 2) do they want the home? Clearly outline the recurring maintenance costs and property taxes. It’s of utmost importance that you carefully consider and plan for any tax burdens placed upon your beneficiaries.
Multiple Options to Consider
As you can imagine, there are multiple options to pass on the family home to your children; such as 1) leaving the home in a will, 2) selling or gifting the property while you’re alive, or 3) bequeathing the home upon your passing through a trust or ‘transfer-on-death’ (TOD) deed. Not all U.S. states recognize TODs, so here’s a list of states that authorize such deeds. Every option has legal and tax implications, so it’s best to consult a financial advisor and estate planning attorney to determine the appropriate arrangement.
How to Pass Down the Family Home
Here’s a brief outline on leaving the family home in your will, selling the home, gifting the home, or placing the home in a trust.
Leave the Home in Your Will
One of the most straightforward ways to pass on your home is through a will. However, assets that transfer through a will must be probated; which can be time-consuming and expensive. You can avoid probate by using a trust. Also, when your beneficiaries inherit the property and later sell it, they will pay capital gains tax based on the fair market value (FMV) of the property at the date of your death. Fair market value is the determined price that a property will sell for in an open market.
- Some states may require your estate to pay state taxes.
- If you’re a Medicaid recipient, upon your passing, Medicaid could put a lien on your home to recuperate its funds.
Sell the Home to Your Kids
As you age, a multi-story home may no longer be an option for you. It’s not uncommon for people to eventually need a single level home with wide hallways. These factors and more will impact your decision-making process for passing along the family home; one of which is selling the property to your children.
Selling a home to your beneficiaries enables you to move, or put some of your home’s equity to use in another investment; regardless of your motive, it’s recommended the home is purchased at its fair market value. If the home is sold as a ‘bargain sale’ it will be considered a partial gift and could generate unwanted tax implications.
- By selling a home to your beneficiaries, the transaction will eliminate the home from your taxable estate; consequently, it creates a new cost basis for the property. Going forward, the capital gains on any future sale will be calculated from the valuation established at the time your beneficiaries purchase the home.
Gift the Home to Your Kids
Your generosity to loved ones is boundless. We can’t think of a kinder gesture than gifting the family home to your children; however, if you don’t plan this transaction correctly it could generate negative tax consequences for your beneficiaries, as well as impact your ability to receive Medicaid benefits.
Upon your passing, the executor will value all the estate’s property; six months later, they can reevaluate your property again. At that time, the executor will use the valuation that results in the lowest possible estate tax outcome. Ultimately, the executor is trying to get the estate’s value to be less than the year’s federal estate tax exemption; in doing so, no estate tax will be paid. As a result of the Tax Cuts and Jobs Act of 2017, the individual exemption for deaths in 2021 is $11.7 million; if your estate’s value is less than this amount, your estate will not pay estate taxes. A married couple has a combined exemption for 2021 of $23.4 million. As you can imagine, the majority of estates are not subject to this tax as the exemption is incredibly high.
Capital Gains Tax
The cost basis of the home gifted to your beneficiaries will be its FMV; importantly, the FMV will be based upon the executor’s chosen valuation date, not the purchase price you paid. In this scenario, the adjustment is called a stepped-up basis. This process enables your beneficiaries to minimize their capital gains tax liability if they sell the home. Due to capital gains implications, it’s often more advantageous for your beneficiaries to receive the home as an inheritance rather than as an outright gift.
- If you transfer assets within five years before applying for Medicaid, you could have your eligibility withheld for a period of time. This is called a transfer penalty.
Place Your Home in a Trust
Irrevocable trusts are a way to reduce tax burdens and avoid assets going to probate. Please note, a revocable trust, or living trust, has no tax-planning benefits. These trusts are typically used as tools to easily facilitate asset transfers.
If you place the home in an irrevocable trust, it requires you to give up all ownership rights to the property. As you no longer own the home, you cannot count the property among your estate; therefore the estate will not pay any estate taxes on the transfer. Additionally, you cannot modify the trust after it’s been created without the consent of your beneficiaries.
- You can sell the home, however all proceeds must remain in the trust.
- Anticipate a Medicaid penalty period if you apply for Medicaid within five years of transferring the house.
In the event you have multiple beneficiaries, and only one individual wants the property, you can establish equitable financial arrangements to compensate the other beneficiaries. Regardless if you sell, gift, or pass down the home to your beneficiaries, the property will receive a new cost basis upon your death. Any capital gains taxes generated from a future sale will be calculated using the FMV at the time of transfer; as such, be sure to factor these figures into your estate plans. We recommend you consult a tax advisor or estate planning lawyer to evaluate all options for passing down your family home.
Disclaimer. HereToday is not a legal service. This content should not be taken as legal advice. Before drafting any legal document, please consult an attorney.