Passing Down a Home: Estate Planning

Published August 23rd, 2022 
Reading Time: 6 minutes
estate planning

Written by:

Tony Assadi, CFA
Zoe Network Advisor

Passing Down a Home: Estate Planning

Published August 23rd, 2022 
Reading Time: 6 minutes
estate planning

Written by:

Tony Assadi, CFA
Zoe Network Advisor

Home is where we raise our children, grow into adults, and care for our loved ones. When considering the future of a property, it is imperative to temper your emotions and consider all courses of action to properly adjust to your estate planning . 

What is a home? A place of gathering for life’s momentous occasions, holidays, times of mourning, and in many families, the simple joy of a weekly meal to catch up on the prior week. Home is where we raise our children, grow into adults, and care for our loved ones. All of this to say, there truly is no place like home. When thinking about your estate planning, passing down your home should be highly considered. 

The Future of Your Home

When considering the future of a property, it is imperative to temper your emotions and consider all courses of action; addressing the disposition of an asset as valuable as a home requires a deep dive into the potential costs and benefits of each option. The best place to start is an open and honest dialogue with your heir(s) regarding the property to determine if your desires align.  Provide clear information on the implications of each potential course of action.

Estate Planning Your Home in 1, 2, 3

As with all estate-related matters, it is prudent to contact your estate planning attorney to explore sensical options and, most importantly, to draft a staged plan which will take effect over the course of your life. Your financial situation and goals are unique to you and your family. The following strategies delineate the three primary means to address real estate assets when planning for the future.

Gifting

In many cases, people are naturally inclined to pass their home or other property to their children as gifts. As generous of a gift as this may seem, there are serious repercussions to consider. Depending on how the gift is transferred, the property could be counted towards your lifetime gift and estate tax exemption. At the time this article was written (Aug 2022), the federal gift tax exemption was $12.06m for an individual and $24.12m for couples.  While this may seem like a large sum of money, the legislation governing gift taxes is set to decrease by 50% beginning in 2026, barring the passage of other legislation between now and then. If the federal estate and gift exemption is further reduced, the recipients of your generous gift could be subject to as much as a 40% federal tax bill, in addition to the gift and/or estate tax of your state government.

Sell your home to heir(s) or loved ones

A second option is to sell the property to your heir(s). This liquidates capital from the asset’s sale to be invested in a new property, finance retirement, or cover the cost of care encumbering people later in life. This strategy removes the property from your estate while establishing a new cost basis for the acquiring party. This way, they may reduce their future tax burden if they dispose of the property.

Selling the property to your heir(s) at market value may not be feasible. As a result, many individuals think to outsmart the system by selling the property to their heir(s) for a negligible price, such as one dollar ($1). After all, a sale is a sale.  Why would this sale be handled differently or even subject to gift and estate taxes?  Unfortunately, the tax code requires all properties to be sold at or near fair-market value to avoid triggering the gift reporting requirement and potentially, a very large bill from Uncle Sam.

Bequeathing

There are three methods to bequeath property to an heir(s):

  1. Last Will and Testament: A will is the simplest way to leave property to an heir(s).  You simply designate to whom you would like to pass the property upon death and outline the percentage of ownership each party will receive. Wills are, unfortunately, required to go through probate, which necessitates the payment of legal fees by the heir(s) at the time the will is validated. This, at times, can be a lengthy process.
  2. Transfer-on-Death Deed: There are currently 29 states (and Washington D.C.) that allow for the utilization of a transfer-on-death deed. It is important to consider a transfer-on-death deed is governed by the state in which the property is located, not your state of residence.  Even if your state of residence does not have this provision, it may still be utilized if your property is located in one of the aforementioned states or in Washington, D.C.
    This method works similarly to a bank account or brokerage account that is designated “TOD” or transfer on death.  The designation can be changed at any time throughout your life and will avoid the probate process upon the death of the current owner. This can reduce costs associated with passing the property and get around the drawn-out probate process to transfer the property.  A transfer-on-death deed can also reduce the amount of time the property is not receiving the maintenance and care it needs.
  3. Trust: Transferring the property into a trust has several benefits that none of the other options outlined can provide. If a property is transferred into a trust, the current owner may retain control over the property during their lifetime and establish how the property may be utilized and/or disposed of upon their passing. The property would remain as part of your estate until death and may be transferred outside of probate or remain in the trust after death, depending on the stipulations outlined in the trust documents.

Passing Down Your Home In A Nutshell

Regardless of how you choose to pass your property to your heir(s), there are many factors to consider.  For one, the property can be disproportionately expensive to maintain for you and your heir(s). After a lifetime of earning and acquisition, it may be comfortable for you to pay for the maintenance, upkeep, property taxes, and general cost of ownership of the property you are considering passing. 

When planning the legacy you wish to leave your loved ones, communication is key. Talk with your heir(s) about their dreams, desires, and the future you have envisioned for them.  It may be appropriate to include your loved ones in discussing these matters with your financial and legal team so everyone has a clear understanding of what their future holds. These conversations can and should happen with a financial advisor. Talking to an expert on the subject can help this process be smoother, and passing down a home as estate planning is the gift you may want it to be, whether that is a gift for your heirs as property or a gift for your investments as profits. 

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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