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What’s the Best Way to Pass the Family Home to Heirs?

What’s the Best Way to Pass the Family Home to Heirs?

Troy Werner and his family

Written by Troy Werner

Troy Werner has been an indispensable asset to The Werner Law Firm since joining in 2009, providing exceptional legal service to its clients.

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POSTED ON: May 29, 2024

There are many ways to hand down a house—from gifts to outright sales, irrevocable and revocable trusts to wills—each with different benefits and drawbacks.

One family wanted their daughter to have the home where she grew up. They gave it to her as a gift.  However, they continued to live in it until their deaths. With the help of an estate planning attorney, the process was handled outside of their will, according to a recent article from Newsday, “Wills, trusts, sales: How Long Island parents pass houses to kids.” This ensured that the house didn’t go through probate, which can be costly and time-consuming.

In a real estate market where prices and interest rates keep rising, parents are taking steps to keep their homes in the family, building generational wealth and creating a legacy of stability. However, how this is accomplished can have consequences, especially regarding Medicaid eligibility and taxes.

The best of circumstances is when parents can hand down a home they own outright, with no mortgage or a small mortgage. When property is transferred from one owner to another, the bank or mortgage lender can demand the full mortgage payment. While the parents could continue to pay the mortgage, the lender could still demand full payment once ownership transfers.

If the mortgage company decides to demand full payment, the mortgage cost could go up dramatically, since interest rates today are higher than they were ten years ago.

Leaving a home to a child in a will is the most common way to pass the house to the next generation. If the children decide to sell the house, the basis is the value of the house at the time of the parent’s death. Beneficiaries named in a last will and testament get a stepped-up basis. This means the capital gains the heir incurs are based on the home’s value at the time of the parent’s death. The value of the home when the children decide to sell could be far higher. However, the gain is erased for tax purposes for the heirs, which is a significant saving.

If children decide to keep the house for a while, they should get an appraisal or comparative marketing analysis to prove the home's value at the time of death. If the house is sold many years later, they must confirm this value to use the stepped-up basis.

If the house remains in the parent’s name while they are living, the children may face an issue if the parent needs to apply for Medicaid for long-term care. Medicaid could deny coverage if the house is in the applicant’s name, no spouse is living in the home and the applicant’s equity is higher than the current $1.071 million limit. Medicaid might still pay for long-term care if someone owns a home under the limit and is otherwise eligible. However, it could claw back money from the Medicaid patient’s estate after they die.

Gifting a house is another way to transfer ownership. Parents can sign deeds and gift the property.  However, this needs to be done with the lifetime federal gift tax exemption in mind. While the $13.16 million level is one most people don’t need to worry about, it’s a factor for wealthy people.

Other options for transferring a home include using revocable or irrevocable trusts and transferring homes by signing over a deed while retaining a life estate on the deed, which allows parents to remain in the home as long as they live.

If you need help setting up a complete and comprehensive estate plan for transferring a family home to the next generation, consider consulting estate planning professionals. The Werner Law Firm probate attorneys in Los Angeles can guide you through the intricate details and help you make the best choices for your family's future.

If you have any questions, schedule a free appointment with us through our online appointment page. We would be happy to see how we can help.

You can also read reviews from some of the hundreds of clients we have helped over the years.

Reference: Newsday (May 2, 2024) “Wills, trusts, sales: How Long Island parents pass houses to kids”

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