For most people, planning for their family’s future is critical. When you have worked hard your whole life, you want to ensure you pass down your most important assets to your children. The family home is one of these important assets, and unfortunately, the complex estate planning process can result in unintended consequences if done improperly. At Johnson Law Group, our Colorado estate planning attorneys work with our clients to understand their goals and objectives, and then we plan their estates to ensure that your property is distributed accordingly. Contact us at (720) 730-4558 to set up a free consultation.
When someone passes away, their property must be distributed among their heirs. When they have a Last Will & Testament (will), their belongings are distributed through the probate process, which means that the designated personal representative must collect all of the individual’s assets and administer them according to the will. However, a will is not the only way to pass on property, and depending on how you plan to pass on your family home, there can be additional legal and tax consequences. Therefore, you should consider speaking to a Colorado estate planning lawyer if you are considering passing your family home to determine which strategy is right for you.
There are various ways to incorporate property into your estate plan, each with various pros and cons. Some of these methods are discussed below.
Leaving no estate plan is by far the worst way to pass down your home. When a person dies without a will or trust, the default intestacy laws of the state apply. The decedent’s assets titled in his or her name are distributed among the heirs, and the decedent has no say in who gets what property. This is not advisable, so if you currently do not have an estate plan, you should consider speaking with an estate planning attorney at Johnson Law Group to help you better understand your legal options.
On the other hand, leaving a will directing the disposition of your assets gives you a better chance of ensuring that your property is passed according to your wishes. When you leave a will, the personal representative must distribute the property to the beneficiaries you chose, which will generally lead to your desired result. It is important, however, to also consider contingent beneficiaries in case your first choice predeceases you or otherwise chooses not to accept the bequest.
One of the biggest benefits of leaving your family home by will is that the person you leave it to will not have to pay taxes on it. Property received by will or inheritance is not subject to federal income tax. Further, your beneficiary will receive a stepped-up basis, which means that the basis they acquire will be the fair market value of the property at the date of the testator’s death, rather than the testator’s original cost basis. This can have serious tax consequences down the line if the property were to be sold in the future, as it will minimize the gain on the sale of the property.
Trusts are a very flexible way to manage assets both during your lifetime and after your death. Trusts can be either revocable or irrevocable, and they can be created while you are still alive or upon your death by will. For many people, putting their property in a living trust is the best way to manage it and ensure it is available for use by their loved ones. The trust agreement places the legal ownership of the property on the trustee, who is often a bank or financial manager, but the agreement sets forth the terms of the asset. For example, the trust may specify that the trustee manages the investment in the property, but the designated beneficiaries, such as your children, have the sole right to live in and use the home.
Trusts are generally inexpensive to administer and can allow you the opportunity to make changes during your lifetime. Another reason some people choose a trust is that it avoids the probate process and passes according to the terms of the trust agreement. However, after the grantor dies, it can be very difficult to make changes to the trust.
You may not wish to wait until after you pass away to transfer your family home to your loved ones. Many people want to make a lifetime gift or sale to their children, which can make sense in some circumstances, such as if your children are moving in and taking care of the home. However, there can be some tax downsides to this method.
When you gift your property during your lifetime, you may be subject to a gift tax if you otherwise would have been liable for estate tax. In other words, if you would have owed estate tax had you passed the property upon your death, then you would owe gift tax for transferring this property during your lifetime. Another tax consequence is that the transferee will not receive the stepped-up basis. Rather, they acquire the transferor’s original cost basis, which means they may owe more tax if the property is later sold.
Similarly, if you were to sell the property to your children at fair market value, then you, as the seller, may owe income tax on gains from the sale. Selling and gifting property can have serious financial consequences, so it is encouraged that you speak with an estate planning attorney at Johnson Law Group and a financial advisor before making these decisions.
Another way to keep the home in the family is to jointly own it. Rather than sell or gift it outright, perhaps you want to put your children’s names on the deed with yours. If you were to gift or sell your children a portion of the interest in your property, there may be the same tax consequences as discussed above. However, one benefit to joint ownership is that you can designate on the deed that the children will have a right to survivorship. The property would then avoid probate and pass automatically to the other owners upon your death.
A transfer-on-death deed, which is sometimes referred to as a “beneficiary deed,” is similar to joint ownership, except that the transfer of ownership does not happen until the transferor’s death. This is not a will or trust, but rather a revocable deed that specifies what should happen to the property upon the owner’s death. This is also a popular option because it avoids the probate process and passes automatically.
The estate planning process can be daunting, especially when considering how to pass on your family home. It is difficult to think about what will happen to all of your belongings after you pass away, and you always want to ensure that your loved ones continue to be taken care of. At Johnson Law Group, we work with our clients to develop an estate plan that meets their needs. Call us at (720) 730-4558 to set up a consultation with an experienced Colorado estate planning lawyer.