Considerations For Your Home As Part of Your Estate

Estate Planning
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Photo Credit: Scott Webb, Unsplash

Key Points

1. A home is often the most valuable asset in a person's estate.

2. Unlike other assets, a home raises challenging estate planning considerations.

3. Collaborate with your tax, legal, financial, and investment advisors to establish an estate planning approach that works best for you and your heirs.

Your home presents some delicate estate planning issues that assets such as stocks or mutual funds do not. Here are some possible options for dealing with your home that you should discuss with your tax, legal, and financial advisors or investment professionals.

Stay in Your Home
The possible impact on your estate and beneficiaries might be a compelling incentive to stay in your house for the rest of your life. If your estate's value is less than the estate tax exemption level, your beneficiaries will get a stepped-up payment according to the home's current fair market value. In other words, a later sale of the house will not result in capital gains tax on the appreciation since you purchased it. Furthermore, if your estate is less than the estate tax exemption rate, your estate will be excluded from federal estate taxes (your estate may be required to pay state estate or inheritance tax).

Gift the Home to a Child
Transferring your house to a child or other beneficiary may be a reasonable choice, especially if you have many properties or want to relocate for whatever reason. Nonetheless, giving is subject to specific, stringent regulations. You will, for example, have to use your gift tax exemptions. Furthermore, you and your spouse may be required to pay gift tax in certain instances. When you give your house as a gift, your child prefers to avoid the benefit of getting the home on a stepped-up basis. This implies that when they eventually sell the residence, the capital gains taxes will be more significant.

Put the Home in a Qualified Personal Residence Trust (QPRT)
This is something to think about if you have a large estate (several million dollars). A qualified personal residence trust, in general, includes the transfer of a private residence to a trust, with the grantor (you) maintaining a qualifying term interest and the right to dwell in the property for a certain amount of time. The IRS computes the value of your right to stay in your house over the time period stated in the trust. This value is typically far lower than the home's market value.

The house's value is included in your estate if you die before the end of the qualifying term. If you live until the end of the eligible term interest, the residence goes to the trust's beneficiaries, at which point you can relocate, pay rent, or establish alternative living arrangements.

Because a QPRT is a grantor trust, it is subject to unique valuation requirements for estate and gift taxes. Your financial adviser or investment specialist may advise you whether this choice suits your situation.

It is critical to consider all of your estate planning choices concerning your house. Your financial adviser, investment professional, or estate planning specialist can help you choose. 

 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

Portions of this article were sourced from the work of MFS Heritage Planning. Neither MFS nor any of its subsidiaries are affiliated with Optima Capital Management.

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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