There are different ways you can pass down a home and they all have their pros and cons. Estate planning is complicated but can be very valuable and beneficial. “It’s perfectly natural to want to see a cherished homestay within the family. But you need to think about not only your own needs and wishes but also those of your heirs,” says Georgia Pennock of Schwab Wealth Advisory. Here are several things the professionals say to keep in mind when you are planning your estate.
1. Sell it
Selling your home to your child or to another family member is a great idea if you need the equity out of it now. The reason why many choose to do it this way is to have the property removed from your taxable estate. If it is a family member, you will want to sell it for a lower price to them but this is not a good idea as you do not want it to sell under fair market value. If you do this, the difference between the sale price and the market value could be taxed as a gift.
2. Gift it
Even though this would be considered a generous gift, it could have a negative impact when it comes to taxes. Everyone has a lifetime gift tax exemption which for an individual is $12.92 million, for married couples is $25.84 million currently. The number will fall by half of its current amount starting in 2026. This would mean that a gift could be taxed to up to 40% of the estate!
3. Pass it down
The three methods for doing this are by last will and testament, transfer-on-death-deed and trust. The last will and testament are where in your will you name those the property is going to and in what proportions. The downside of this is that the will must go through probate court. This can be a time-consuming and expensive process. The transfer-on-death deed can be an option if you do not want to go through probate. This way you can pass the property to your heirs outside probate upon your death. Trust is another option if you do not want to go through probate. When doing this method, you transfer the property into a living trust where you will have a good amount of control over how the property is managed and the logistics of selling the property. It would remain in your estate until your death and then it would be passed on.
4. Talk it out
Before selling, gifting, or passing your property to an heir, talk to an attorney or a tax advisor. These professionals can help you put a plan into place that is the most cost-effective way for your situation. Don’t forget to talk to family members about your decision because it will affect the family members you pass the estate to.
“The most important thing you can do is to make sure all family members are part of the conversation. That way, everyone has the chance to see their needs and wishes reflected in the plan for your home, which can avoid unnecessary conflict down the road,” says Pennock.
Remember that however generous you are, there are other financial aspects to put into consideration. “You don’t want to make your kid’s house rich and cash poor. Nor do you want them fighting about the costs of ongoing maintenance and upkeep,” warns Pennock.
