Finance & Real Life; Passing Down Real Estate to Your Heirs

There are many ways to leave a legacy. While we believe that ultimately wealth is more than simply what you see on a net-worth statement, we believe it’s a combination of both the financial side of things and the intangible items like time, memories, lessons, and values. One of the ways you can leave a financial legacy for your loved ones is by passing down Real Estate to your heirs.

Using a Will vs. a Trust

Typically, real estate will be passed to heirs through a Last Will & Testament. However, some people choose to use a trust in order to minimize costs and avoid delays in transferring assets. The decision to use a will versus a trust depends on a few factors.  The first question we would ask is, “How complicated and expensive is the probate process in your state of residence?” When you pass away your estate must go through a process called probate.  In some states, the process is very simple, fast, and inexpensive.  Usually, a will is adequate in these areas of the country.  In other states, it is a bit more complicated, and using a trust can minimize costs and avoid delays when transferring assets at death.  Another question we often ask is regarding estate taxes. If your parents are in an estate tax situation (assets over $12.06 million per individual or $24.12 million per couple for 2022)  they may want to consider planning with trusts to minimize estate taxes at death.  Talking with a local estate planning attorney is the best first step to answering many of these questions.

Considerations for selling vs. gifting to children

If you are thinking about selling your home to your children as part of your legacy there are a few things to consider.

 The first is the tax basis in your home. Are you selling the house or gifting the house? These situations are treated differently from a tax standpoint. Oftentimes, selling the primary residence will have a minimal tax impact.  However, if the house has appreciated more than $250,000 for a single parent or $500,000 for a married couple, you may run into a taxable situation. You should discuss the sale with your CPA or financial planner.  Selling your primary residence to your children if you need the profits may be tax efficient, provide parents with additional liquidity, and keep things simple. If you are selling a non-primary residence, be careful because selling a non-primary residence does not have the same tax exclusions.  Each situation is different, so be sure to discuss your specific situation with your CPA and financial planner.

If you are gifting the house, you may want to think twice before doing so. With a gift while living, the tax basis will transfer to your kids, giving them a potential unexpected tax bill if they sell the property in the future.  With a transfer at death, your kids will get a step-up in basis. Then if they sell the property in the future, the higher basis will help minimize taxes.

Another option to consider is a transfer-on-death deed (TOD deed). Most states now offer this option and it is an easy and effective alternative for transferring real estate upon your death. A TOD deed allows you to decide who receives ownership of the property at your death.  It can be helpful if you do not want the property to pass through your will and the probate process.  In states with a complicated probate process, this can be a great strategy.

Family Conflict

If there are multiple siblings who don’t get along, we encourage families to speak with a local estate planning attorney.  They help people through these situations all the time.  The worst thing you can do in a high-conflict family situation is to avoid creating an estate plan.  The best gift you can give your family is a well-thought-out and documented estate plan.  It will clearly define who gets what or controls what asset.  In high conflict situations, you can consider using corporate executors and trustees to help. It increases the expenses but puts a third party in place to help minimize family conflicts after you pass away.

We have helped many clients work through settling estates.  Some are complete disasters, while others are very smooth and simple. Benjamin Franklin said it best, “By failing to prepare, you are preparing to fail.”  Don’t set your family up for failure, take responsibility and get your estate in order before you pass away.