How Do I Give My Children the Summer Home?
There are many ways to pass property on to children, such as gifting a home to them while you are still alive, bequeathing it to the children at your death, or selling the home to your heirs. Each has legal and tax implications, so consider the possibilities and consult with an experienced estate planning attorney.
According to USA Today’s recent article entitled “How estate planning can help you pass down a house to your kids and give them a financial leg up,” as you put a plan in place, here are three options to review.
Gifting the property to children. One idea for a landlord with rental properties is to set up a revocable trust, where a trustee is responsible for liquidating houses as they became vacant, as long as the tenants were in good standing. This type of plan is built around the idea of maximizing the value to our children as beneficiaries and minimizing the impact on the trustee, while compensating them for their troubles. In addition, there may be tax implications. When you give a house or any other capital asset to your children while you’re alive, there’s significant capital gains tax issues because of the carryover cost basis. The use of a trust avoids probate. It gives the children a step-up in basis and allows them to avoid capital gains tax.
Bequeathing a house to heirs. You can gift the family home to the children while you’re still alive, bequeath it to them at your death, or sell the residence to your heirs. A will is the standard way to bequeath property to children. Parents have the ownership and benefit of the property during their lifetime and when the last parent dies, the children get the home with the stepped-up basis (the increased value of the property when it passes to the inheritors). Keep in mind that bequeathing through a will means that the house will have to go through probate. In fact, if you reside in Louisiana, and the summer home is in another state, you may have to go through two (2) probate proceedings; one in Louisiana and the other in that other state.
A trust is another option to bequeath property. Placing a house into a trust avoids probate court and, if set up the right way, will save on taxes. You can say who gets the property and set guidelines on how they get the property. If one child wants the property, for example, you can state they have to buy out the other siblings. Note that adding the children to the deed of the house means they will each own the house. Therefore, if one child wants to live in the home, the others won’t be able to sell because that child won’t be in agreement. A trust can prevent this from happening.
Selling the home to the children. Selling a home to an adult child may be wise, if the parents can no longer afford to maintain the property. However, there can also be pitfalls if the agreement isn’t well thought out. Parents should think about ways to save money when selling to their children, such as deeding the property to the kids and having them refinance the property and cash the parents out. If parents sell the home below fair market value to their children, they’re restricting their ability to have a retirement. This leaves little to help with retirement, since many people don’t have pensions and are only living on Social Security. There are also tax consequences, if parents sell the home for more than they paid. The sale may result in higher property taxes to the purchaser in some situations.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “How Do I Give My Children the Summer Home?” read these additional articles: How Can I Clean Up My Estate Plan? and What OTC Drug Makes High Blood Pressure Worse? and Should I Start Estate Planning Now? and Any Ideas How to Pay for Long-Term Care?
Reference: USA Today (Dec. 7, 2021) “How estate planning can help you pass down a house to your kids and give them a financial leg up”