Tips for Leaving Your House to an Heir
For many people, a home is more than a physical structure — it’s a place filled with cherished memories and sentimental value. In our experience, one of the most valuable and complex assets to hand down is often the family home. Not only can it be an incredibly emotional experience, but it’s also one where it’s difficult to find common ground on “what to do.”
In addition to the emotional component, it’s important to incorporate thoughtful planning to ensure your home is passed along according to your wishes. A well-constructed plan will help your family and loved ones to fulfill your wishes while minimizing the risk of potential legal, financial and tax complexities. By proactively communicating your wishes and making decisions for the property, your heirs can have clarity and a clear course of action for when the time comes. Consider the following tips when determining how to effectively pass down your home.
#1 – Start planning early.
Leaving your home to an heir is a significant life event that requires careful consideration and planning. Start the process early, and openly discuss your intentions with your family members and intended heirs. By initiating discussions well ahead of time, you can gain an understanding of their wishes and help ensure your decisions align with their hopes for the future. Having open discussions can also help minimize potential conflict among family members and potential heirs. Clearly articulate the reasons behind your decisions to help them feel comfortable with your approach.
#2 – Understand the potential tax consequences.
Transferring property to an heir can trigger various tax consequences, including estate taxes, gift taxes and/or capital gains taxes. To minimize the tax burden on both yourself and future recipients, work with a qualified estate planning attorney or tax professional to implement a tax-efficient transfer strategy.
#3 – Explore different transfer options.
There are several ways to pass down property to an heir:
Joint ownership
If you plan on living in the home until you pass away, you may wish to add your heir’s name to the property’s title as a joint owner. This option ensures that the joint owner receives full ownership rights to the home without any restrictions after one’s passing.
If a spouse is listed as the co-owner of the home, the value transferred to the spouse is exempt from estate and gift taxes as they benefit from the unlimited marital deduction. The surviving spouse would inherit your ownership interest of the home and become the sole owner.
When a non-spouse co-owner is listed:
- The value transferred is considered a gift and must be reported for gift tax purposes, meaning it counts toward your lifetime exemption amount.
- Lifetime gifts to non-spouse heirs are subject to the carryover of cost basis, which may be equal to the original cost of the home (excluding improvements). This means they may be subject to higher taxes due on the future sale for the property because they’ll likely not be eligible for a step-up in cost basis at the time of your death.
- As a co-owner of the home, your heir assumes ownership of a portion of the home’s value. Should your they experience financial difficulties, initiate divorce proceedings or incur debt issues, this could put your home at risk of a lien or other legal action. Further, you would need the permission of your co-owner to take out a new mortgage, refinance the existing mortgage or sell the home in the future.
Will
A traditional will allows you to name an heir as the beneficiary of your home. Within your will, you may wish to have a testamentary trust setup, which can provide more control over how your home is managed and used following your death.
It’s important to note that having a will alone doesn’t prevent your assets from going through probate, which can be a timely and expensive process for your executor and heirs. In addition, because a will is a public document, anyone can see who inherited what assets. For those who have concerns regarding their privacy, this document alone will not provide privacy in estate administration.
Revocable trust
A revocable trust allows you, as the “grantor” or “trustee,” to maintain control over your home while specifying exactly how and when it will pass to your heirs. Following your death, the trust enables your home to be quickly and privately transferred to your heir while bypassing the probate process. This approach allows you to retain full control and use of your home during your lifetime and a seamless transition after you pass away. Although establishing a trust involves a slightly higher cost than a will, it allows for you to have greater control over the distribution of your assets after your passing.
Qualified personal residence trust (QPRT)
A QPRT can help you transfer your home’s ownership at a reduced gift tax rate. Using this approach, the home is immediately transferred to a trust, but as the owner, you maintain the right to continue living in the home for the QPRT’s duration. Following the end date of the trust, the house is transferred to the designated beneficiary, and you no longer have an official right to live there (however, it’s common to negotiate a lease with the beneficiary).
There are two main benefits of a QPRT:
- A reduced gift tax rate because you, as the original owner, retain residence rights and maintain some of the home’s value.
- Thevalue of the home is frozen at the time the trust is created, which means your heir’s estate tax liabilities aren’t impacted by future appreciation.
For this strategy to be most effective, the original owner must outlive the terms of the trust. If you die before the trust ends, the value of your home will be included in your taxable estate.
The complexities of using this strategy to pass down a second residence or a mortgaged property may outweigh the benefits. It’s wise to consult with a qualified estate planning attorney to determine whether this approach makes sense given your personal financial situation.
#4 – Evaluate your heir’s financial readiness.
Make sure your heir is financially prepared for homeownership and the ongoing commitments associated with the property. Passing down a home can mean additional financial responsibilities for your heir, including property taxes, home insurance, maintenance costs and mortgage payments that they may or may not be prepared to take over.
Could you use some help determining how best to pass down your home? Creative Planning is here for you. Our focus on multigenerational wealth planning means our experienced advisors regularly help clients make difficult estate planning decisions. If you have any questions or would like help with your strategy, please schedule a call with a member of our team.
