Estate Planning Articles, Tax Planning Ideas and Tax Updates

Four Ways to Give Your Home to Your Favorite Child

by Alli Thomas

Oct 13, 2022

For many people, their home is the biggest asset they have. Though sometimes retirees must sell their home as they age to cover medical expenses or other costs, it is the biggest component of many estates. 

That’s why deciding on what happens to your home after you pass or if you become incapacitated is one of the most important elements of estate planning. 

At the very least, you should state who you want to get in a will, especially if you want it to go to a specific person such as your favorite child. Otherwise, it will be the courts that decide who gets the house. 

While a will can help keep the court out of the picture, it might make sense for you to make other preparations. Here are four options: 

Do Nothing

According to some financial experts, staying in your home until you die may be the best possible option. If your home is transferred as part of an estate, its tax basis will be increased to the home’s current market value. The result is that whoever receives your home won’t have to pay capital gains on the appreciation in value between your purchase of the home and your death. 

If the value of your home doesn’t bring the estate’s value above the gift tax exemption limit ($12.06 million for 2022), it won’t be subject to federal estate taxes, either. In this case, your chosen heir will have the option of either moving into the home or selling it without facing a significant tax liability.

Give it as a Gift

Unless your estate is worth more than the gift tax exemption limit, you likely won’t have to pay that tax if you gift your home to your children outright. Just remember to file Form 709, the IRS’ gift tax form, if you gift more than the annual gift tax exclusion limit ($16,000 for 2022) to any person in one year. 

However, if your heir decides to sell the home without living in it, he or she may face a painful tax consequence, as a home’s tax basis doesn’t change when it is transferred as a gift. Instead, its treated as if the recipient bought it for the same price you originally paid, so capital gains taxes will be due on all of appreciation that took place during your years of ownership. 

The good news? If your child lives in the house for at least two years before selling it, they’ll be able to take advantage of the tax exclusion granted for the sale of a primary residence – up to $250,000 for a single person or $500,000 for a married couple. 

One more thing to note: if you have a mortgage on your home, you should confirm with your lender if transferring property ownership as a gift requires that the mortgage be paid off in full upon the transfer. 

Transfer Ownership

Transferring ownership of your home may be done either while you are still living or after you die. However, financial advisors typically strongly caution against transferring ownership while you’re still living for several reasons. 

For example, transferring your deed within Medicaid’s five-year lookback period may disqualify you from applying for nursing home coverage. Also, if your heir later files for divorce or bankruptcy, the home may become part of the divorce settlement or subject to creditors. And should tragedy strike and you outlive the person you transferred the house to, the home will be part of their estate – an issue that may be further compounded if he or she passes without a will. 

In some states, there is the option of transferring ownership upon your death. More than two dozen states permit homeowners to sign a transfer-on-death (TOD) deed. This document works just like any other deed, except it goes into effect only upon your death. In other words, the beneficiary of the TOD deed has no legal right to your home until your death. If you’re married or own the property jointly, the beneficiary cannot take ownership of it until the last surviving owner dies. 

Setup a Revocable Living Trust

Even with a will, your home typically needs to be transferred through probate since it’s a titled asset. The probate process may potentially be a long and expensive process for your children to endure.  

Additionally, your will is also publicly available for anyone to review, which can create privacy concerns. 

If privacy is a concern, you may benefit from establishing a revocable living trust. This type of trust gives you control over your assets during your lifetime plus the flexibility to change your mind about who will receive your assets down the road—and when. And since it’s a private document, you can keep your wishes away from prying eyes.

Get Professional Help

As you can see, estate planning can be incredibly complex, especially if you have multiple people you want to leave assets to – and even more so if some are minors! In most cases, it should not be a do-it-yourself project, especially if there’s a major asset like a house involved.

If you’d like to explore your options for ensuring that your home stays in your family after you pass, click here to request a complimentary, no-obligation conversationwith a financial advisor in your area.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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