Leaving a Home to Heirs
Estate planning has become a thriving business as the baby boomers age and head towards retirement. Among the most frequent question among the baby boomers is how to best deal with their homes. Should I downsize and sell my home to leave a larger estate for my heirs to divide? Should I deed my house to my adult children now to avoid fighting after I am gone? These are just a few questions to think about.
The traditional way to leave a home to an heir is through a will. Nonetheless, there are also several different types of trusts that can help minimize costs and delays connected to transferring assets once you are gone.
Types of Trusts
Trusts can either be revocable or irrevocable. In an irrevocable trust, the grantor does not have the right to call off the arrangement. Whereas in a revocable trust, you can appoint yourself as trustee, then when you are gone it will pass to someone else.
Because many older adults desire to stay in their home, they have opted to gift their home to children. Besides the ability to stay in their home, there are potential tax and health care savings if you choose to transfer your property to your children while you are still living. It may assist you in qualifying for Medicaid, which can help provide long-term health care.
Most estates are not subject to estate and gift taxes because the federal government has set the exemption fairly high at $5.49 million for an individual and around $11 million for couples. (2017 exemptions). If your home is worth a significant amount of money, you may want to consider a Qualified Personal Residence Trust. Essentially, this type of trust allows you to give the property to beneficiaries at a fraction of its value, which in turn reduces the estate tax burden. Through this trust, you would transfer your home to an irrevocable trust but would continue to retain an interest in the house for a defined term of years. This type of trust is ideal for people who expect to live at least for another decade. When you are gone, the Internal Revenue Service calculates the home’s gift value using a specific formula based on several factors. This formula allows the house to be passed down to your heirs at a far less value than the actual market value of the house.
However, if you die prior to the terms of the trust ending, the house will be subject to estate tax at the fair market value of your house. Also, if you outlive the terms of the trust, the property will go to your beneficiary and they have the discretion to ask you for rent or even evict you from the property.
Contact an Estate Planning Attorney
If you are thinking about leaving your home to your heirs while you are alive, we can help you set up a personalized legal document to accomplish this. Contact us for more information.