Your family home is likely the site of many happy memories that become more poignant as you age. As wonderful as it is to have a secure place that you enjoy, it’s an asset that must be included in your end of life plans. Passing the home along to a family member or heir takes planning – and should be discussed with everyone affected, as inheritances often ignite deep feelings.
An experienced estate attorney can help you weigh the pros and cons of different options and explain the tax implications of each. Gifting a home to a family member can be integral to your estate planning strategy. Regardless of the method chosen to transfer ownership within your family, it’s critical to have a fully executed will or trust that spells out your intentions.
Steps to Ensuring Family Inheritance of Real Property
There are several ways to pass a family property to your heirs, rather than selling it and dividing the proceeds among family. Experts suggest making provisions in your will or trust to cover estate taxes if the value of your assets exceeds state or federal thresholds. Illinois imposes an estate tax on assets valued at $4 million or more, but federal estate taxes aren’t imposed on estates valued at less than $13.6 million.
Discuss these options with your estate attorney:
Co-ownership. If you add a child to the deed as co-owner in order to avoid probate court, it’s important to get the paperwork done right – and to discuss the tax implications with the inheritor as well. This type of ownership stake can be considered a large gift and the recipient subject to gift tax on their share of the property’s value.
Life Estate Deed. This option allows the property owner to transfer ownership to an heir, but to continue to live in the home for the rest of their life. Other variations transfer ownership to an heir upon the death of the owner with the stipulation that a third party (such as a spouse or disabled child) has the right to live in the home for the rest of their life.
Transfer on Death (TOD) Instrument. Plan ahead to execute this option, and to have it recorded at the county level: a transfer on death deed allows the homeowner to name an heir to inherit a property immediately upon their death, avoiding probate.
Revocable Trust. A trust is the gold standard for protecting an estate, including everything from real property to investments. By transferring the deed of your property to the trust and creating a will that supports your estate plan, and naming both a trustee and an executor, you’re able to continue living in the home and using the assets until your death. The biggest benefit of passing property to an heir through a trust is that the new owner gets a “step up” valuation. That means that when they sell the property, the market value at the time of their inheritance is what capital gains taxes are based on, often reducing any capital gains tax burden to zero.
Generation Skipping Trust. This tool allows a property owner to pass their asset along to their grandchildren (or similar designee who is at least 37.5 years younger), skipping a generation and bypassing the Generation Skipping Transfer Tax that is triggered when the property value is $13.6 million. By putting the deed into a trust, the next generation can benefit from the property through direct use or income from renting it. The grandchildren’s generation will later receive ownership of the property, allowing them to live in it or to derive income from it.
Plan Your Estate With a Professional
Federal and state regulations govern the use of estate planning tools and the related tax implications. It’s well worth your time and effort to confer with a professional estate planner from Legacy & Life Law Firm LLC to ensure your wishes are accurately conveyed through a comprehensive and legally-sound plan. Contact us today for a consultation.