Each decision has legal and tax implications, so consider the possibilities and consult the professionals.
When you make a plan, here are three options to consider.
Gifting property to children
Greg Wilson, 42, of St. Louis, Missouri, has been an owner for 22 years. He recently retired from financial services and now owns ChaChingQueen.com and ClothDiaperBasics.com with his wife Irene. As the father of three children under the age of four, Wilson has already decided what to do with his property.
When his wife was pregnant with their first child, he set up a cash fund, in which the trustee was responsible for liquidating homes when they became vacant so long as the tenants were in good standing.
“The entire plan was 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,” says Wilson. “As the son of a landlord, I also wanted to avoid the common scenario of children fighting over property.”
Another consideration is the tax implications.
“When you give a house, or any other capital asset, to your kids while you're alive there’s huge capital gains tax issues because it's called a carryover cost basis,” says Patrick Simasko, elder law attorney and wealth preservation specialist at Simasko Law in Mount Clemens, Michigan. “Using a revocable trust avoids probate and gives them a step-up in basis and allows them to avoid capital gains tax.”
Bequeathing a house to heirs
“A will is the standard way to bequeath property to children,'' says Mary Kate D’Souza, a co-founder and the chief legal officer of gentreo.com, an online estate planning platform. “The 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,” she says, referring to the increased value of the property when it passes to the inheritors.
However, attorney Simasko thinks a revocable trust is the best option to bequeath property. Placing a house into a trust avoids probate court and saves on estate taxes.
“You can dictate who gets the property and set parameters on how they get the property,” Simasko says. “If one kid wants the property, for example, you can state they have to buy out the others.”
Keep in mind that adding the kids on the deed of the house means they will each own the house. Therefore, if one child wants to live in the home, the others will not be able to sell because that child won’t be in agreement. Says Simasko: “Using a revocable trust can prevent this from happening.”
Selling the home to the kids
As part of a coordinated estate plan, selling a home to an adult child may make sense, especially if the parents can no longer afford to maintain the property. It can be a win-win solution, says D’Souza, but there can also be pitfalls if the agreement is not well thought out.
Kala Taylor, a realtor with Berkshire Hathaway Elite Home Services in Sacramento, California, advises parents to think about ways to save money when selling to kids. For example, “deeding the property to the kids and having the kids refinance the property and cash the parents out.”
In the end, she says, parents should think about the most cost-effective way to sell the home to their offspring.
“If parents sell the home below fair market value to their kids, then parents are restricting their ability to have a retirement,” says Simasko. “This option leaves little to help with retirement because many people don’t have pensions and are only living on Social Security.”
In addition, there are taxable gains consequences if parents sell the home for more than they paid, says Patrick Hicks, an estate planning attorney and Head of Legal at Trust & Will, a site that helps families create estate plans. “A home’s sale may result in higher property taxes to the purchaser in some cases,” Hicks says.
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