Estate planning is the process of legally structuring the next disposition for all projected and current assets. Many clients tend to come up with a sound plan also look into real estate properties such as rental properties, a vacation home or a primary residence. So if you were looking to sell a home, check out the following important estate planning questions to address.
1. I have a primary residence. Should I solely or jointly title it with my child?
This type of property is often sold as included in the estate administration. Its net sale proceeds would then be distributed as a component of the estate residue. On the other hand, you may also consider giving the property to an adult child or a beneficiary.
If it will be part of your Last Will and Testament, the disposition to it would go to your heir. While titling the primary residence this way may avoid an estate settlement or simplify things, it might lead to income tax consequences later, though.
2. Should I transfer real estate wealth in my lifetime or after death?
You can do it during your lifetime or afterward. When choosing the first option, consider the gift tax imposed on the property transfer that also applies to all indirect and direct transfers.
However, if you don’t transfer your real estate assets during your lifetime, you still own them. And with that, those assets will be subjected to the estate tax according to the gross estate amount exceeding your unused lifetime exclusion (40%).
Some homeowners try freezing their property value to reduce estate tax through intra-family transfers. In this case, you can make the sale directly to a grantor trust or to family members.
And if the real estate assets are transferred at the time of their current fair market value, you won’t have to worry about gift tax.
However, gift tax implications, along with other concerns, must be addressed first for intra-family transfers done at a reduced value.
- Future real estate property appreciation will be outside the estate.
- The asset’s value is locked on the transaction date.
- The real estate sale can provide future cash flow to your heirs if the sale is under a ‘promissory note.’ (*Cash flow can become a problem when considering transferring away from the real estate property.)
- This type of sale may allow the assets to be transferred to a younger heir without the Generation Skipping Tax.
3. Should I make a will to pass down the real estate property?
It is a good idea, but it is not required. Remember that the intestate statute is going to pass all your assets, including real estate property, to your children or closest relatives based on state laws. But you can consider a will if you want the land, for instance, to go to a specific person or stay together.
Now if you don’t want your children to inherit the asset, you must have that written in the will, or else you cannot allocate where you want your home or any other real estate properties to go due to unfavorable relations. If not, things can get messy for everyone you’d leave, especially if they’re selling the home later.
In short, make sure you’re providing specific names and spelling out those that you don’t want to profit from your real estate property.
4. Can I sell the house to avoid any capital gain fees as I have lived there for at least two out of the five years? Should my children sell the property and then pay the capital gains?
If you’re in the situation wherein you own a life estate and your children the remainder interest, you (you and your children) can sell the home taking into account all the details and circumstances. However, none of you can force the entire property sell in the absence of a court order.
Instead, each of the family members will profit based on the ownership interests once you and the other interest holders wish to sell the home. For you, the interest will be based on life expectancy; thus, your home ownership decreases every year per federal charts. In the end, your children would divide the proceeds among each other.
In the above scenario, your life estate will qualify you for the exclusion amount, but your children whose basis in the property is called the carryover basis, should pay the capital gains based on when they last lived in the inherited home. And as they received the gift from you, they also inherited your basis.
The answers contained herein are not the basis for individual legal advice. You should not rely on them for your specific case – with distinct facts to tackle and discuss with an asset protection attorney. Thus, it would be impossible to evaluate your real estate and estate planning problem without a review of the documents and facts and comprehensive consultation.
Seek help from an experienced estate planning lawyer in your jurisdiction for sound and proper legal advice. After all, it’s smart to discuss real estate in estate planning to avoid any bitter squabbles and confusion down the road should the people involved wish to sell your home.
Sit down, talk about your real estate assets and estate planning with your loved ones and with a qualified attorney today!