Homeowner Estate Planning: Real Estate Tips

Image of someone using a marker to check boxes on a list written on a piece of paper. Captioned: Homeowner Estate Planning Real Estate Tips

Ready to move estate planning to the front burner? Homeowners, especially, need to have a plan in place. If there is no will, and no other arrangements for the home to pass to a co-owner, it will pass according to the state intestacy provisions. That’s not an estate plan. There’s no better time than the present to choose a beneficiary, and make an estate plan.  

Here is the basic set of options, and how they might play out—financially, legally, and in emotional terms. We include a few tips to note in the process. Any or all could be a great conversation starter with your lawyer or financial adviser. Schedule a talk with family or other beneficiaries, too.

The Home as a Bequest

What do you envision happening with your house? Are your children—or other potential beneficiaries—aligned with your vision? Be sure the next one in line for your home wants it. Otherwise, that person might be unready for the legal fees and taxes, not to mention the expenses that come with home maintenance.

One big benefit of leaving your home in a will? The beneficiary gets a stepped-up cost basis. So, if they sell the house, only the rise in worth since you pass away—not way back when you bought it—gets taxed. 

Are there any liens on your house, such as a mortgage? Fortunately, beneficiaries needn’t prove “ability to repay” if they wish to take over the mortgage

If you don’t know anyone who will want the home, you might be thinking of selling. Capital gains tax might not be a big issue. The IRS allows an exclusion of up to $250,000 (double that for certain owners filing a joint return) in capital gains from the sale of most primary residences. 

Pro tip: Note that states, not just the IRS, apply estate taxes at certain levels of wealth. State exemptions can be much lower, so check to see if your beneficiary could face a hefty estate tax bill, and be forced to sell or scramble for financing options.

The Home as a Gift

To keep the transfer of a home private, simple, and free from probate, you can pass your interest in the home on as a gift. If you do, keep these facts in mind:

  • The giver, also known as the grantor, pays state and federal gift tax—unless the interest is worth under $15,000 or being passed along to a spouse. If the value is close to the line, be safe. File IRS Form 709.
  • If the home has risen in value, your beneficiary will owe full capital gains taxes when ultimately selling the home. There is no stepped-up cost basis to offset capital gains.

For simplicity’s sake, can you just add the heirs as co-owners on the current deed? Well, you could… But you’re still making a taxable gift. And new joint tenants become co-owners as soon as you change the deed. Say you add a child to your deed. Now, your child is a co-owner. If your child runs into money issues or court proceedings, your home may wind up with a judgment lien. And what if, one day, you and your child disagree on whether to sell or refinance your house? Things could get prickly. 

Placing the Home in a Revocable Living Trust

A revocable trust lets you keep control and use of the home while you’re alive. You decide how, when, and to whom the home and other assets pass to others, bypassing the probate process. Meeting with a lawyer who handles estates and trusts will be vital, to title your assets properly for the trust.

Once you have shifted ownership into the trust, you are at liberty to revoke the trust if you decide on a different plan or circumstances change later. It’s your call.

Pro tip: If you own homes in multiple locations, a trust can save your estate from a fragmented probate process. 

Second Homes: Qualified Personal Residence Trusts

qualified personal residence trusts allow you to give your home away without leaving it—yet.

The QPRT includes a date certain when home ownership transfers to the beneficiary, such as children or their trust. Should you die before that effective date, the QPRT is no good. Your home goes where it would have gone anyway: into your taxable estate.

A QPRT can be used for a primary home, but is frequently chosen for vacation properties. This is because it the owner must give up the home on the specified date, or come up with a rental arrangement to stay.

The key benefit? As a delayed form of gift, the QPRT lowers your gift tax. 

Pro tip: To simplify gift tax issues, pay off the mortgage before the QPRT transfer date.

Using a Transfer on Death (TOD) Deed 

You can pass the interest in your home deed along with a TOD, if allowed for real estate in your state. Record the TOD in the county, and your loved one automatically owns the home after you pass away. A revocable transfer on death deed gives you a win-win: it keeps the home out of probate, yet the beneficiary still enjoys the stepped-up cost basis. 

A TOD does have its limits. You may name people or charities as beneficiaries, but not a trust. So, if your hope is the pass the house to your children but they’re still young when the transfer occurs, the TOD is impractical. There is no contingent beneficiary. If the child named on the deed dies first, you would need to make a new deed.

Pro tip: Use care if passing the home to anyone relying on government benefits. Their qualifications for the benefits could be changed by the home value. One more word to the wise. States actively try to recover Medicaid’s long-term care benefits from probate estates. If you depend on these benefits, there are reasons to keep your home out of probate.