Ensuring Your Home is Passed on to Your Children
For many parents, a primary concern as they develop their estate plan is making sure their family home or homes are passed to their children. They want the process to be free of unnecessary burdens and weighty tax consequences. At KLG Estate Planning & Probate Attorneys, we’ve spent decades navigating the passing of property for Massachusetts’ families. We understand that for many families their home is, by far, the most valuable asset in their estate. There are several different options to investigate to determine the right fit for your comprehensive estate plan and your family. Here are the four most common ways parents choose to pass their homes onto their children:
- Include the house in your Last Will and Testament. This tactic allows your children to inherit your home upon your death. This will allow your children to avoid estate taxes in the Commonwealth of Massachusetts if the total amount of your estate is less than one million dollars. It will also reduce the amount of capital gains taxes your children will pay if they decide to sell the house later. Be aware, however, that using this strategy as part of your estate plan does not protect your property if your circumstances dictated a need for MassHealth (Medicaid in Massachusetts). In some instances, MassHealth would have the ability to place a lien on the property.
- Put your house in a trust. Using an irrevocable trust will allow you to name your children as beneficiaries of the property. Therefore, when you die, your home will no longer be part of your estate and thus not subject to estate taxes nor Medicaid estate recovery. An irrevocable trust is, as implied, unchangeable once established. Once your house is put in the trust, you can’t take it back out. If your financial future is uncertain, weigh this option very carefully.
- Sell your house to your children. If you want to sell your property to your children for an amount that is under fair market value, the difference (the amount between market value and the actual sale price) can be considered a gift. In that instance, you would be allowed to use Massachusetts’ allowed annual gift tax exclusion. You may also choose to sell your home at full market value while holding a note on the property. In this instance, you could still use the annual gift tax exclusion to cover all or part of the cost of the payments. This option is incredibly complex and must be executed correctly.
- Gift the house to your children. If you want to gift your home to your children, you’ll likely need to file a gift tax form. You also need to be aware of the total gift tax exclusion amounts for an estate (which change frequently). If you want to avoid a gift tax, don’t exceed the established amounts. Your children may still have to pay capital gains taxes on the property, especially if they are planning to sell the home. In addition, MassHealth may be able to invoke a transfer penalty if you apply for Medicaid within five years after making the gift.
Effectively transferring your family’s home to your children can be difficult to get right. You want to ensure everyone’s interests are protected, and the burden on you and your children is minimal. The team at KLG Estate Planning & Probate Attorneys knows this element of a solid estate plan is critical. We can help you get it right.