Weekend Read: Why Gifting Your Home to Your Children Might Not Be the Best Idea: Exploring the Benefits of a Trust

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When it comes to estate planning, many people consider gifting their home to their children as a way to pass on their most significant asset. While this gesture often comes from a place of love and the desire to simplify asset transfers, it might not always be the best strategy. Here’s why putting your home in a trust might be a better option.

The Challenges of Gifting Your Home1

Gift Tax Implications - Gifting a home directly to your children can lead to significant gift tax implications. The IRS allows for an annual gift tax exclusion amount, which can change from year to year. If the value of your home exceeds this limit, you could face gift taxes or reduce your lifetime gift tax exemption. This might result in unexpected tax bills or decrease the amount you can pass on to your heirs tax-free.

Loss of Control  - Once you transfer ownership of your home to your children, you lose control over it. This means you can't easily change your mind or make decisions about how the property is used or managed. If family dynamics change or if you need to sell the home to cover unexpected expenses, having already gifted it might complicate matters.

Loss of Step-Up in Cost Basis - A major drawback of gifting your home is the potential loss of the step-up in cost basis. When you gift your home, the property's original purchase price (cost basis) carries over to your children. If they sell the home in the future, they could face capital gains taxes based on the difference between the original cost and the sale price. Conversely, if you hold the home until your death, your heirs receive a step-up in cost basis, adjusting the property's value to its fair market value at the time of your death. This means if they sell the home shortly after inheriting it, they likely won’t owe capital gains taxes, as the sale price would be close to the stepped-up basis.

Why a Trust Might Be a Better Option2

A living trust, specifically a revocable living trust, offers several advantages over directly gifting your home:

Continued Control and Flexibility - By placing your home in a revocable living trust, you retain control over the property while you’re alive. You can modify the trust, including altering its terms or adding and removing assets, as your situation changes. This flexibility allows you to adapt your estate plan without giving up control.

Avoidance of Probate One of the major benefits of a trust is that it helps your estate avoid probate. Probate can be a lengthy and costly process, where the court oversees the distribution of your assets. With a trust, your home and other assets can be transferred to your beneficiaries quickly and privately, without the need for court intervention.

Privacy Unlike a will, which becomes a public record when it goes through probate, a trust generally remains private. This means the details of your estate and the distribution of your assets are kept out of the public eye, protecting your family’s privacy.

Potential Tax Benefits Placing your home in a revocable living trust allows your heirs to receive a step-up in cost basis. This means the home's value is adjusted to its fair market value at the time of your death, minimizing or even eliminating capital gains taxes if they sell the home immediately. Thus, using a trust can offer significant tax benefits and preserve the value of your estate, making it a more strategic choice for managing and transferring appreciated property.

Smooth Transfer of Assets A revocable living trust is a legal document that lets you assign your home and other investments to. When you pass away, the trust ensures a smooth transfer of these assets to your beneficiaries, exactly as you’ve planned. This process avoids the lengthy and often sometimes costly probate court

Conclusion

Gifting your home to your children may seem like a straightforward way to pass on your most valuable asset, but it can come with complications that affect your finances, control, and family dynamics. By placing your home in a revocable living trust, you can maintain control, avoid probate, and potentially benefit from a step-up in cost basis, all while ensuring that your estate is managed according to your wishes. It’s always a good idea to consult with an estate planning attorney to explore the best options for your specific situation and to create a plan that aligns with your goals and needs.

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Jeremy Raffer, MBA
Director & Wealth Manager
Author "Financial Planning for Widows"

 

m. 201-747-2705
w. rafferwealthmanagement.com
e. jeremy.raffer@stewardpartners.com

Steward Partners
115 W. Century Rd, Suite 145
Paramus, NJ 07652.

1https://www.investopedia.com/retirement/4-risks-giving-your-house-your-child/

2https://www.investopedia.com/articles/personal-finance/122016/buying-home-trust.asp

Steward Partners Investment Solutions, LLC (“Steward Partners”), its affiliates and Steward Partners Wealth Managers do not provide tax or legal advice. You should consult with your tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.

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