Real Estate Planning
A home is typically the largest non-financial asset owned by Americans at the time of death. As such, the transfer of one’s home is often a major consideration during the estate planning process. If you do not know where the deed to your home is located, not to worry! Possession of a deed is not equivalent to proof of ownership of real estate. Your county recorder stores images of all deeds and other recorded documents in historical records. Only the recording of a real estate transaction with your local real estate records office is sufficient to change how title is held on real estate. Such documents are publicly available to provide proof of ownership.
Whether the goal is to avoid probate, minimize capital gains, or attempt to qualify for Medicaid, there are several ways a home can be transferred through an estate plan. If you have been in your home for a number of years, the value of your home has likely appreciated markedly since the time of purchase. Therefore, simply gifting your home to a loved one during your lifetime could have significant capital gains tax implications. So, what are some effective ways to plan for the transfer of your home while minimizing capital gains? Below are a few options:
Transfer on Death Deed: In some states known as a Lady Bird deed, a transfer on death (TOD) deed allows the original homeowner to maintain full control and possession of the property during his or her lifetime. Upon the death of the original homeowner, the home will transfer to the named beneficiaries without probate court involvement. The TOD beneficiaries will also enjoy a stepped-up basis, which is advantageous from a tax standpoint. A TOD deed is a fairly inexpensive, simple way to keep your home out of the probate process.
Living Trust: By transferring a home into a living trust, a homeowner is able to transfer his or her real estate to a beneficiary or beneficiaries named in said trust without the involvement of a probate court. Real estate in a living trust will not be included in the original homeowner’s estate, meaning the real estate will pass outside of the probate process, saving time and money for those left behind. Upon the death of the original homeowner, a home that has been placed in a trust can be sold and proceeds distributed to loved ones with the benefit of a stepped-up basis for capital gains considerations.
Life Estate: By transferring property to a beneficiary during life while reserving a life estate in a home, the original homeowner maintains the right to live in the home during his or her lifetime. Upon the original homeowner’s death, the home transfers (with a stepped-up basis) to the named beneficiary. With a life estate, it is important to keep in mind that the original homeowner must give up many ownership rights to the property, including the ability to mortgage or sell the home, during his or her lifetime.
After considering all factor and options, an estate plan can be a very useful tool for arranging the transfer of a home. For more information, take a look at this recent article by Forbes.