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Building wealth is only half the job. Protecting wealth for your loved ones and yourself is equally important. Through estate planning, business planning, and asset protection, our firm will help you protect everything you love — family, friends and favorite charities. For more information be sure to visit our web site where you will have access to our blog, events schedule and a complimentary newsletter subscription!
Great Planning Begins at Home
It has been said that your home is your castle and home is where the heart is. Without a doubt, the place we call “home” is a very special place. This is especially true if your family is grown and gone. Can you hear laughter in the walls from birthdays, holiday celebrations, or graduation gatherings? Intermingled with the joy, there may be some sorrow in those walls, too.
Yes, home is a very special place.
In addition to the memories that reside inside, your home likely holds a significant amount of your personal wealth. Consequently, you need to make sure your home is protected while you live there. When you are ready to leave your home, there are some important things to know about selling your home or even transferring it to your loved ones.
In this article we will survey some fundamentals to help you avoid some common legal and tax mistakes when it comes to your home, along with some thoughts on transferring it successfully.
Insurance and State Law Protections
The purpose of homeowners insurance is obvious – you pay an insurance premium you can afford now to cover a loss you cannot afford later. Whether it is a fire, flood, twister, or other disaster, such insurance only makes sense. In fact, mortgage companies require homeowners to maintain homeowners insurance as a condition of the mortgage. In addition to at least a basic homeowners policy, ask your insurance agent about an “umbrella” policy to provide additional coverage above your policy limits. This added protection is relatively inexpensive, but it can protect your home and other assets in the event you were sued. All it takes is one “slip and fall” by an invited (or uninvited) guest on your property for the policy to pay for itself many times over.
All states afford some degree of legal protection for your home itself should you be sued or file for bankruptcy. Some states protect a certain dollar value, others may protect the homestead to varying degrees depending on how long you have lived in your home, and still others may provide full protection to married couples when they jointly own the home as tenants by the entirety. In the end, state law will control when it comes to the degree of protection afforded your home ownership. An experienced estate planning attorney can explain the protection unique to the laws of your state.
Joint Ownership Dangers
Most married couples own their home together and that is reflected right on the deed to their home. If owned as “joint tenants with rights of survivorship” or as “tenants by the entirety” and not as “tenants in common,” then no “probate” is required for the “surviving spouse” to “inherit” full ownership of the home.
When that happens, do not make the common “mistake” of adding the name of an adult child or other family member as a new “joint tenant” of your home to avoid future probate at your passing. This single mistake can have many serious tax and non-tax consequences, to include:
- Triggering current “gift taxes,” while losing the full stepped-up basis at death;
- Subjecting your home to the liabilities of your joint tenant (e.g., divorces, lawsuits, or bankruptcies); and
- Penalizing you for Medicaid eligibility purposes.
Gift versus Inheritance
When you gift your home, whether by adding one or more loved ones as joint tenants or by transferring full ownership to them by deed, you are also making a future gift to the IRS in the form of additional capital gains taxes when the home is sold. That is because you are giving your loved ones your basis in the home along with the home. On the other hand, if they “inherit” the home from you, then the basis they inherit is the fair market value of the home as of your date of death. This one move can make a big tax difference.
Wills, Deeds and Living Trusts
There are a variety of ways to transfer your home at death. One method is to do nothing and let the probate court distribute your home according to state law. This method may not reflect your wishes and can be rather expensive and time consuming. A last will can enable you to control who inherits your home and authorize the most streamlined probate process permitted in your state. This can save considerable expenses and delays.
If you want to bypass probate, then consult with a qualified estate planning attorney to determine whether your state provides for non-probate real estate transfers. About 30 states provide for “beneficiary deeds” to transfer your home without probate upon your death. These deeds are revocable and amendable by you during your lifetime, too.
Revocable living trusts are a popular method to avoid probate on your home and all of your other assets. Basically, you create the trust, name yourself as trustee, and are the beneficiary throughout your lifetime. If you become incapacitated, then a successor you appoint takes over … but you remain the beneficiary. At your death, the trustee then administers and distributes the trust assets according to your instructions.
All wills and deeds are a matter of public record. If “privacy” is important to you, then you may want to consider using a revocable living trust to transfer your home and other assets.