For many individuals, their personal residence is likely their most valuable asset. If you wish to leave your residence to a specific person when you die, you need to include the passage of your home in your estate plan to ensure that your wishes become reality.
While this blog posting will discuss some of the options available to you, it is not all-comprehensive and you need to discuss your wishes with your estate attorney (and perhaps a real estate attorney). Due to the tax laws regarding basis in your personal residence and how to compute the taxable gain when a home is sold or transferred, it is best to include your tax professional in these estate planning meetings to avoid unpleasant tax surprises.
Here are some options available to you.
- If you include your home in your will, it will transfer upon your death to your named beneficiaries. If you have several children and say one child wishes to keep the house and the others wish to sell it, a family feud could end up in court. Accordingly, you may wish to stipulate that the home be sold and the proceeds split among the beneficiaries if such a situation arises or that one child could purchase the home from the other beneficiaries. If one child receives the home, you can state in your will who will receive other assets of equal value to avoid potential for conflict. If the house is transferred via your will, you will need to consider the probate rules and costs that may apply. This is just one example as to why you need to consult with an estate planning attorney.
- Create a revocable living trust — a living trust is established while you’re still alive. You transfer assets to the trust, but you still care for the maintenance of the home and receive the benefits of home ownership. When you pass away, the assets in the trust are transferred to your beneficiaries as designated in the trust document. Using a trust avoids having your residence go through probate. In some states, this could be a big time and money saver.
- Create an irrevocable trust. Since you would be transferring the ownership of your residence to the trust, you no longer are the owner of your residence and the trust document would govern your use of the residence. Again, an estate attorney needs to be consulted as well as your tax advisor.
- The wording on the deed on your residence needs to be reviewed by a real estate attorney and estate attorney. Deed wording such as transfer on your death or joint tenancy with right of survivorship may allow your home to be transferred to your heirs without delays associated with probate or the cost of setting up a trust. With the transfer on death, you own your home 100 percent while you are still alive, and you’re free to do whatever you want with it. When you pass, the home automatically transfers to the beneficiary named. With joint tenancy with right of survivorship, you and the other person named on the deed are co-owners of your home. The house automatically transfers to your co-owner when you pass. A drawback? You don’t have full control over your home, so if you want to borrow against the house or refinance it, your co-owner might object and even take you to court to stop you. Your home is subject to the debts of your co-owner, and if he or she gets sued by a creditor for a past-due debt, a lien might be put on the house.
- You could sell your residence today to the “beneficiary” of your choice and then rent that residence from the buyer/beneficiary. If structured properly as an installment sale, you hopefully will receive a monthly amount from the sale that exceeds the rent you will need to pay, resulting in increased monthly income to you. The buyer has a rental property and has your rental income to help offset the costs associated with the purchase and the other costs of owning real estate. You need to consult with legal counsel to ensure that you have a lifetime tenancy.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
