Creating a smooth, cost-effective transition begins with some serious thinking now.
Thinking about leaving your home to your children is as natural an instinct as, say, providing food and shelter while they’re growing up, right? And as you age, the time may seem more right than ever to move ahead with such plans.
While leaving your home to your kids may seem straightforward, there are smart ways to transfer property that benefit both parties and also some problematic approaches to avoid.
Here are three smart ways to give your house to your children and three possible complications to keep in mind.
3 smart ways to pass the property on
Create a trust
There are many kinds of trusts. They’re all legal structures that can hold assets, such as a house. A living trust can be even more useful in this regard. It provides you with a way to manage and distribute your assets while you’re alive and after you’re gone. A big plus is that trust beneficiaries are not subject to debt obligations associated with the assets when they’re distributed.
And, as the grantor sharing the wealth, you have the option to be the trustee, too, but will need to designate a successor trustee, in case you become incapacitated or die before the trust’s assets are exhausted.
Use a gift deed
Another option is to use a quitclaim or gift deed to transfer the title to your children. That means you’re handing it over in “consideration of love and affection” without getting any money in return. You also can retain what’s known as a life estate on the property. That means it’s theirs now but you have the right to stay in the place for the rest of your life.
Giving the equity over time
This is a way to share ownership in the home as a gradual process until it’s all theirs. You can give part of your home’s equity to your children each year. If you want to avoid taxes on it, stay within the annual gifting limit. This year, that’s $17,000 per child. Giving incrementally like this also shrinks your taxable estate as you go.
3 potential pitfalls to keep in mind
A will may not be the way
It’s tempting and easy, but if you simply leave your house to your kids outright in a will, they may well end up with all its debts, too, including the mortgage, and more. Consider whether they’re financially up to home ownership. A trust or gift deed can help ameliorate that risk. Wills also have to be probated, potentially adding a lot of time and expense to the process. Again, you might consider a living trust versus a will.
Relying on your relationships
Giving away your house before you pass can create complications if the relationships go south. Your children could try to sell the house while you’re still in it in some circumstances, or simply not pay their share of the property’s taxes and expenses that you agree on.
Make sure everybody’s on solid ground emotionally, legally, and financially — at least as much as you can — before you legally commit. That’s perhaps doubly important if you’re also relying on those children to take care of your finances responsibly and compassionately if that need arises in your life. Of if you find yourself in that position yourself, for that matter.
Neglecting the tax implications
There are myriad tax implications to consider when you leave your house to your kids, depending on the value of the house, the size of your estate, their income, and yours. Gift and inheritance taxes are the obvious ones but consult an expert to make sure you don’t miss anything that comes back with a tax bite later, for you or your beneficiaries.
Do it the right way to enhance their lives and your legacy
Leaving your house to your kids can be a great way to help them build wealth and achieve their financial goals. But take the time and give it the thought needed to do it the right way. It also takes knowledge.
Consult with an accountant to structure the gift properly and an attorney to vet the legalities. As for the personal stuff, well, find the best guidance you can, even if it means keeping your own counsel on that one.
With the right plan, your kids can inherit your most valuable asset seamlessly when the time comes.
