Keeping a home in the family after the owners’ death is a frequent desire. There are many ways to effect transfer of ownership within a family, and some are more cost effective than others. Expensive mistakes are all too common. Knowing the rules before acting is likely to result in a smoother and more efficient transaction.
We frequently hear phrases such as, “I put my kid’s name on the house,” or “I want to give my home to my kids to keep it in the family.” Hearing things like that makes us cringe. Most often, it is the exact wrong thing to do.
There is generally no actual advantage to accelerating the turnover of the property during the life of the owner, and in fact there are several potential pitfalls.
Remembering that we are not giving legal advice, but rather financial planning tips, here are some possibilities.
Let’s start easy. The simple way for a homeowner to transfer a property to heirs in to die with a valid Will. This may sound a little insensitive, but in plain English, it works. You will not be involved in any estate messes that may arise either, assuming you have prepared a valid Last Will and Testament.
Far too often, the owner believes that by waiting until death to transfer the home, they run the risk of the home being taken by a financial institution or the government. Many people believe that an additional name (or names) on the title will prevent that outcome. These are generally not valid assumptions.
If changing ownership while alive, and also remaining in your beloved home as long as possible are priorities, it can be done, but caution is advised. One easy way to keep a home in the family is through an outright gift. With the large gift tax exemption today, it will almost never trigger gift taxes. That sounds good enough, but there are some longer-term tax complications with this methodology, and it is almost never the best idea.
Another option is the Qualified Personal Residence Trust, or QPRT, designed to accommodate homeowners whose estates will be large enough to possibly trigger unwanted estate taxes when the owners pass. Again, these households are rare, due to current large estate tax exemption limits. QPRT rules are numerous and exacting, so professional legal help is a must.
Frequently, people ask us about selling their home to their beneficiaries for a bargain price. This is seldom a good idea, because taxation rules are complicated, and mostly work against the recipient of any gift or bargain. This method may also expose the original owner to unwanted displacement from the residence.
An alternative option is to sell your home to heirs at full price. You can hold a mortgage that way, charge a low interest rate (check IRS guidelines for the current minimum interest rate). This method may offer the best overall tax arrangement for the seller, but other family considerations must be meticulously examined.
An old saying reminds us that the road to Hell is paved with good intentions. Be very careful how “nice” you are with your most valuable assets, and especially your residence. Getting professional financial and legal guidance will likely save money and potential family turmoil.
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