Estate Planning With Your Home
For most of us, our home is our most valuable asset. Planning for the disposition of your home is an important consideration. Unfortunately, many do-it-yourself plans cause more problems than they solve.
In order to plan for the disposition of your home, you must first determine how title to your home is held. If the property is held as "joint tenants with rights of survivorship" or as "tenants by the entireties," then at your death, your interest in the property will pass automatically to the other owner(s). (In the case of tenants by the entireties, the other owner can only be your spouse.) This is true regardless of what your will states. Joint tenancy property passes by operation of law outside of the will and the probate system.
Because of a desire to avoid probate or other reasons, many people add their children to the title of their property without fully considering the consequences. Adding someone to the title of your property may result in a number of unpleasant consequences, including:
- Inability to undo the transaction. You cannot take title back on the property without the consent of the person you have added to the title.
- Inability to control the property. In order to sell, refinance or mortgage real property, every owner must consent and execute the necessary documents. If your child will not agree, your only course of action may be to file a partition action which will force the sale of the property.
- Loss of a portion of the property. If your child owns part of your home, that portion may be seized by your child's creditors. For example, if your child declares bankruptcy, you may be forced to buy your child's interest or sell your home.
- Disposition of the property not in accordance with your wishes. If you hold title to your home as joint tenants with rights of survivorship with your child, then at your death the property will pass to him or her. You may believe that your child will sell the property and share the proceeds with his siblings, but he will have no obligation to do so and may not comply with your wishes.
- Gift tax consequences. Adding someone to the title on your property is not merely a convenience. You are giving a portion of the property to that person. If the value of that portion exceeds $11,000, the gift may be subject to gift taxes.
Because of these and other potential consequences, it is generally not desirable to add your children or others to the title of your property. So what are your other choices? First, you can retain title in your own name and execute a will. The home will be subject to probate at your death, but probate is not onerous. If you wish to avoid probate, you can transfer the home to a revocable trust. Either way you will retain complete control over the property and not be subject to the risks of your children's creditors. Another option is to transfer a remainder interest in the home to your children while retaining a life estate. A life estate means that you are entitled to live in the home for the rest of your life. The transfer of a remainder interest can have the same consequences as adding your child to the title except the risk of losing your home while you are alive. If a creditor acquires your child's remainder interest, the creditor will have to wait until your death to take the property.
If you are concerned about estate taxes, a Qualified Personal Residence Trust ("QPRT") can be an advantageous estate planning vehicle. You transfer your home into an irrevocable trust. The trust states that you have the exclusive right to use the home for a specified period of time (e.g., 20 years). The trust further states that, after the 20 years, the trust terminates, and the home goes to the beneficiaries (e.g., children). Essentially, you have given your home to your children, with the gift to take effect in 20 years. The right to receive something in 20 years is not worth nearly as much as the right to receive it now. Thus, the value of a gift of a home to take effect in 20 years may be worth only 25% of the value of the home, meaning you could transfer a $1,000,000 home to your children at a gift tax cost of $250,000. QPRTs are governed by the Internal Revenue Code and must meet strict requirements, but they can yield tremendous tax savings.
In summary, your home is an important asset. Do not execute deeds or other documents without carefully evaluating the consequences.
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