Homeowners will likely, at some point during home ownership, discuss the future transfer of their property. When it comes to this form of estate planning, different options can have different consequences. The following will focus on some of the more common tax consequences of frequently used methods:
- Doing nothing. A very common situation, and often an unwise move for the wealthy, involves doing nothing. A failure to have a plan in place generally means state laws govern the transfer of the property. Those with an estate valued over the federal estate gift and estate tax exemption amount (approximately $11 million) will likely have to pay taxes if they use this method.
- Changing the title of the home. In some cases, the property owners may add a child or children to the title of the home. Although this can ease the legalities of the transfer, it can also lead to an unnecessary tax bill. As a result, this is generally not a great option if the home has gained significant value.
- Using a trust. Another option that may be more beneficial if the property has gained value and/or for high worth estates is the use of a living trust. A trust can serve two purposes. It can better ensure a smooth transfer from the parents to the child. It can also reduce the risk the Internal Revenue Service (IRS) will expect the child to pay income taxes on the property if it is sold.
These are just a few options to consider to better ensure your estate transfers to loved ones without an unnecessary tax burden.