Options for Passing Your Family Home Down to Your Children
January 18, 2022
It is not uncommon to want to pass a home full of fond family memories down to your children and keep it in the family for future generations to enjoy it in the same way that you did. To fill it with their family and continue creating warm memories.
When you get down to the logistics of actually passing on the property to your children, it needs to be looked at as a business transaction, putting warm feelings aside. There are several legal factors that go into passing your home on to your children, including tax requirements. Here are four options for passing your family home on to your children. Which one you should choose will depend upon your personal situation.
Selling the Home to Your Kids
It is possible to sell your home to your kids while you are still living and plan to continue living in the home. One huge requirement of doing this is, the home needs to be sold at the current fair market value. It can’t be sold to your kids at a steep discount. A discounted home will be seen as a partial gift and will bring about extra tax responsibilities.
You can loan your kids the money to purchase the home, but you must charge interest and declare that interest as income.
Selling your home to your kids while you are still living can be a great option if your kids can afford to purchase the home at fair market value and plan to live in it or utilize it. It is a good plan if you are looking to retire to a smaller and less expensive home, but want to keep your current home in the family.
There are ways to work out selling your home to your kids if you plan to live in it until you pass away, but these options can become complicated especially should you need to move to an assisted living facility.
Giving the Property to Your Kids
If you are wanting to give the property to your kids, the best way to do this is through a revocable living trust. If at any point you need or want to change your mind, you have the freedom to do so. Make sure to check the terms of your mortgage for a “due-on-sale” clause. This will force the mortgage to be paid in full upon gifting the property.
Gifting a property runs the risk of the home being foreclosed upon and taken out of the family if the recipient comes into future financial struggles. It is better to give the home after you have passed away to limit the tax requirements.
Bequeathing the Property
Bequeath means to leave a personal estate (or one’s body) to a person or beneficiary through a will.
In planning to do this, you should discuss it with the person you plan to leave the property to. Help them to be aware of what accepting the home would mean. That it would require them to pay the property taxes, insurance, and of course take on the costs of maintaining the property.
It is recommended that a trust be put in place with a plan to distribute the property after you pass away. Should no one want to inherit the property, the trust has the authority to sell it after you pass away and equally distribute the profits.
In twenty five states and Washington D.C. property owners can sign a Transfer-on-Death Deed.
The way it works is similar to a bank account’s Payable-on-Death designation which many people use to transfer assets to their surviving heirs. This helps by bypassing the property going into probate and allows you to easily change designation any time before you pass away. The only downside: it’s not available everywhere across the country.
Choosing how you will pass down your family home to your kids can get complicated.
For more information and help with your personal estate planning please contact us anytime. Our goal is to help you find financial options for you.
Clarity Capital Management and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.