Family is one of the most important things in the lives of most people. You probably want the best for your family after you are gone. This means providing financial security as well as preserving precious memories. For many the family home is a means of providing this security and a symbol of the wonderful memories spent with family. This home can be the house you are living in now or it can be a vacation property. Either way you may want to make preparations to ensure the home stays in the family for future generations by creating a thorough estate plan.
Gifting the home to your children
One of the simplest ways to ensure a family home or vacation home is kept in the family is by simply gifting the property to your children. This will help avoid the complicated and costly probate process. However, there are many downsides to gifting the home while you are alive. First, gifting the home will expose the home to liability from your children’s creditors or even former spouses.
Also, children who receive real estate as a gift from parents will have to pay capital gains tax based upon what the parents paid for the home if the children eventually decide to sell. However, those who inherit real estate may be able to take advantage of a step-up tax basis which means capital gains tax liability will be calculated using the value of the real estate when it was transferred to your heirs. Therefore, choosing to gift a home can result in your children having to pay unnecessary capital gains taxes.
Using a trust to transfer ownership
Another alternative to just simply gifting your family home is to transfer ownership through use of a trust. By creating a trust, you will be allowing the trustee to hold title to the property for the benefit of your children, the beneficiaries. Trust documents can instruct the trustee to ensure that ownership of the family home is transferred to your children upon your passing away. In this way your children will be able to take advantage of the step-up tax basis for capital gains, thus saving your children from having to pay higher capital gains taxes in the event that they decide to sell the family home.
If you are worried that the family home, in the hands of your children after you pass away, will be subject to the creditors of your children or even a former spouse, there is a certain type of trust known as a “dynasty trust” which can help to avoid these risks. This type of trust is designed to become irrevocable upon death. The trust will remain the title holder of the property, not your children. The legal language will only allow the sale of the property in certain circumstances. Usually your children will be named the trustees of the dynasty trust.
Making a decision
Choosing which method you want to employ in order to keep your home in the family for future generations will require a full examination of your specific financial situation and circumstances. This is something that you can do yourself through diligent research and lots of hard work. However, it is common for many people to consult with a financial adviser to help crystalize and implement an effective estate planning strategy.