Dealing With Your Home As Part of Your Estate

Your home presents some very 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 advisor or investment professionals. 

Stay in your home

If you are looking for a compelling reason to stay in your home for the rest of your life, the potential impact on your estate and your beneficiaries is a very good reason — provided the value of your estate is below the estate-tax exemption limit.

If you live in your home for your entire life, your beneficiaries will receive the home on a stepped-up basis to its current fair-market value. In other words, a subsequent sale of the home will not generate capital gains tax on the appreciation of your home since the time you bought it. And if your estate is below the estate-tax exemption rate, your estate will also be exempt from federal estate taxes (your estate may, however, be required to pay state estate or inheritance tax).

Gift the home to a child

Giving your home to a child or other beneficiary may seem like a sensible solution, especially if you have multiple homes or if you plan on moving out for any reason.

However, gifting comes with some pretty strict laws. For example, you will have to dip into your gift tax exemptions. In addition, in some circumstances you and your spouse may have to pay gift tax.

When you make a gift of your home, your child will not get the advantage of receiving the home on a stepped-up basis. This means that the capital gains taxes will likely be higher when he or she finally sells the home.

Put the home in a qualified personal residence trust (QPRT)

This is an option to consider for an individual with a sizable estate (several million dollars).

Generally, a qualified personal residence trust involves the transfer of a personal residence to a trust, with the grantor (you) retaining a qualified term interest and the right to live in the home for a specified period. The IRS makes a calculation that values your right to live in your home over the period specified in the trust. As a rule, this value is far below the market value of the home.

If you die before the end of the qualified term interest, the value of the residence is included in your estate. If you survive to the end of the qualified term interest, the residence passes to beneficiaries of the trust, at which time you may relocate, pay rent or make other living arrangements.

Because a QPRT is a grantor trust, there are special valuation rules for estate and gift tax purposes. Your financial advisor or investment professional can help you decide if this option is advisable for your specific situation.

It is important to weigh all of your estate planning options in regard to your home. Your financial advisor, investment professional or estate planning specialist can assist you in the decision-making process.

KEY POINTS

• A home is the single largest asset many people will have in their estate.
• A home presents some difficult estate planning issues that other assets do not.
• Work with your tax, legal and financial advisor or investment professional to develop an estate planning strategy that works best for you and your heirs. 
  

By the Numbers

• The federal estate-tax exemption limit is $12.06 million for individuals and $24.12 million for married couples in 2022.  ¹Source: irs.gov.
  

Important Disclosures: 

MFS Fund Distributors, Inc. is not  affiliated with LPL Financial or StrateFi Wealth Management.
MFS® does not provide legal, tax, or accounting advice. Any statement contained in this communication (including any attachments) concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.