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Use These Tips to Pass Your House to Your Heirs Tax-Free

July 29, 2020 By Kathryn Vercillo Leave a Comment

You would like to pass a house tax-free to your heirs. After all, you want to give them a gift, not the burden of taxes. But how do you do that? Here are some key tips:

Tips to Pass a House Tax-Free Through a Will

When you do your estate planning, you can make a plan to pass your house tax-free to any heir(s) that you would like. For most people, this is the best way to make sure that you’re passing along the home with the least cost to anyone.

The most important thing is to consider the total value of your entire estate (not just your home). If the value is over $11.58 million (this is called the unified federal estate gift and estate tax exemption amount; the amount is as of 2020), then you’ll have estate taxes. If it’s under that amount, you won’t have taxes. Therefore, you can pass a house tax-free through a will if your assets are below that amount. Note this amount is federal; check with your state about local maximums to make sure that your heirs won’t owe any state taxes on the inheritance.

Things to consider:

Make sure you, and your heirs, understand the capital gains taxes that your heirs may have to pay when they sell the property. The great thing about using a will to pass a house tax-free is that it generally gives you the best option as far as this goes.
If you owe any money to Medicaid upon your death, they can place a lien on your property, which can impact your heirs

Use an Irrevocable Trust

If you do have an estate that exceeds the $11.58 million amount then you might want to consider putting the house into an irrevocable trust instead of simply including it in the estate will. Specifically, you might want to look into a qualified personal residence trust.

Once you pass away, the house will go to the heir(s) you’ve designated with the trust. However, if you sell the house, the money goes into the trust; it can’t be cashed out should circumstances change. (Hence, the term “irrevocable.) So, this is not a move to take lightly but it’s something to consider if you have a high-value estate and want to pass a house tax-free to your children or other heirs.

Tips to Pass a House Tax-Free As a Gift

You can gift a house to your children. Don’t you have to pay taxes on that? Not necessarily. If the value of your home is less than the $11.58 million mentioned above, then you probably won’t have to pay taxes on it nor do your children. You do, however, have to file a gift tax form when you do your annual taxes. As long as the value is below that amount, it should just be a matter of filing the piece of paper but not paying any fees.

Review the total value of your estate and your home.
File a gift tax form with the IRS in the year that you gift the home (unless the home is worth less than $15,000)
Offset the total amount of the gift by first using your annual gift-tax exclusion ($15000); note that this is per donee and per donor (so if you and your spouse jointly own the property and you gift it to multiple children then you can increase the exclusion amount accordingly.)
Again, make sure you and your heirs are both aware of the capital tax gains. If your child eventually plans to sell the home, they may pay more if you gift them the house than if you will it to them.
Do not apply for Medicaid within five years of gifting your home to your child. The details on this depend on exactly what your assets are worth but generally speaking there’s a transfer penalty if you gift assets just before applying for Medicaid.

Can You Sell the House and Gift the Money?

Some people really want to pass on their home to their children. And some children really want their childhood homes. But in many instances, it’s more about the money/value than about the home itself. If that’s the case in your family, then you might think about selling the house.

You can sell the home at current market value then gift that money to your child. You can gift it in a will or trust or give it to them directly.
Gift up to $5.49 million to one person are allowed without having to pay taxes on it. You will still need to file the aforementioned gift tax form with the IRS.
Another option is to sell the home to your child at a very low price. The plus side is that they get the house, then they can sell it themselves at a higher value when the time is right for them to do so. The downside is that they may have to pay higher taxes when they do.

Can You Sell The House to Your Child for $1?

This was a common practice for awhile. You technically sell the house, so it’s not a gift. However, this isn’t something that flies anymore, legally speaking. Of course, you could sell the house to your child for $1 if you wanted. But the rest of the value of the house is considered a gift. Therefore, the gift tax rules are still relevant. Moreover, if your child sells the house, they have to report that entire difference as a gain, which impacts taxes.

If you want to sell your house to your child, your best bet as far as taxes go is to sell it to them with a small down payment as a seller-financed sale. You’ll carry the note for the balance. Your adult child will make affordable payments. You can even offset what they pay you by gifting them up to $15,000 per year (which is low enough to not qualify for that gift tax.) Since you’ve sold the home, it’s no longer part of your estate, so you don’t have to worry about that come tax time.

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10 Mistakes Often Made When Estate Planning

July 24, 2020 By Kathryn Vercillo Leave a Comment

Financial planning is an important part of life. Estate planning is one key aspect of planning for the future. It can feel daunting to take on the task, but once it’s done and your future is organized, it usually feels a lot better. Unfortunately, there are a lot of common estate planning mistakes. You don’t have to make them. Here is more information on ten mistakes that you will want to avoid.

What is Estate Planning

Just to be clear, what are we talking about when we discuss estate planning? Put simply, it means putting a plan in place (on paper, often legally) regarding what should happen to all of your assets when you pass away. Estate planning includes, at a minimum, instructions about:

Who you want to receive your items
What you want them to receive from you upon your passing
When they will receive it (often, for children, it’s after they age into adulthood, for example)

You can will away anything that you want to anyone you want including to charity.

10 Common Estate Planning Mistakes to Avoid

Estate planning doesn’t have to be difficult. However, it can be. Avoiding these ten most common estate planning mistakes will help you set a solid foundation for the process:

1. Thinking You Have no Estate

The most common of all estate planning mistakes is not to make the plan. The term “estate planning” can be misleading. You don’t have to have a huge mansion or a lot of valuable things to have an “estate.” An “estate” is just whatever you do have. It’s your car, your furniture, your personal items that may not have monetary value but are special in some way. It’s also your pets; what would you like to have happen to them if you pass before they do?

Don’t make the mistake of thinking that you don’t have an estate. Don’t make the mistake of thinking that there’s no need for you to plan ahead. You might imagine that your stuff isn’t worth anything or that your family will figure it out when you pass. However, that’s not a burden you should place on them. You should clearly outline exactly what you want to happen with all of your assets when you pass away.

2. Planning Only For After Death

Most of what you do in estate planning is related to what will happen if you die. However, you should also think about what will happen if you become incapacitated before your time of death. This is something that is crucial to include in your will. And it’s an important part of estate planning.

In relation to this, don’t forget to include insurance in this plan. Life insurance, disability insurance, and long-term care insurance are all things to incorporate into your financial plan for the future.

3. Differences Between Will and Other Documents

Every time that you update your estate plan, make sure that all of your different documents have the same information. For example, when you signed up for life insurance, you listed a beneficiary. Is that the same beneficiary that you have listed in your will? Everything should match up at all times. Otherwise you create confusion after your death and leave it for your heirs, and the courts, to figure out.

In particular, consider what you want to happen with your retirement accounts. Does the beneficiary you have listed mirror the one in your will? Does that person have creditor issues that would make it a bad idea for them to be the beneficiary? There might be a better way to divvy that up and reviewing that is smart as you do your estate planning.

4. Errors When Planning for Minor Children

There are a lot of things that you have to consider in estate planning when it comes to children under the age of 18. They come down to two categories:

What happens to the children themselves
What and how to pass along assets to children

You need to have a plan in place in case the terrible happens and you pass away before your children come of age. Most importantly, what do you want to happen with your children? Where will they go? Who should care for them? Will you be leaving money to those caregivers for their care?

Additionally, you want to think about passing along your money and belongings to your children. Don’t give the money directly to minor children. Instead, appoint a guardian and/or a trust with clear instructions about what you want the children to have and when you want them to receive it.

5. Confusion with Revocable Trusts

In addition to a will, you might want to include a revocable trust in your estate plan. The main reason to do this is that you list your beneficiary clearly which allows them to avoid lengthy probate issues upon your death. However, if you don’t do this part correctly, you can create problems for yourself. Work with a finance professional to make sure that you understand your assets and interest in the trust, how the trust impacts your taxes, and what the trust costs to set up and maintain.

6. Failure to Consider Taxes in Estate Planning

This is one of those estate planning mistakes that is common because people overlook the issue. You absolutely have to think about taxes in all aspects of estate planning. You want to minimize your costs as well as the costs to your heirs when you pass along your estate. That means thinking about the role that taxes will play for both of you.

Be sure to review this whenever there are changes in tax laws that impact estates. Make sure that you understand federal as well as state tax laws.

7. Lack of Liquidity

Kiplinger cites a failure to maintain adequate liquid assets as one of the top ten most common estate planning mistakes. When you die, your relatives may need cash immediately for many reasons including your funeral expenses or continuing to operate a business you owned.

8. Failure to Consult Heirs

You may think that it’s a wonderful thing to leave your home to your adult child. They, however, might not want the burden of that home. Ask them.

And definitely be sure to have honest conversations with anyone that you want to care for your pets or your children in any way.

Moreover, it’s a good idea to discuss your plans with your loved ones in advance so that they know what you expect I case of disability or death. The more open you are now, the easier it should be for them when that time comes.

9. Failure to Name More Than One Beneficiary

Let’s say that you have three adult children and have named only one of them as a beneficiary. That might make sense in your family if that person is the most responsible. However, what if that person passes away? Then what happens to your estate? Hopefully you update your estate plan regularly enough that it isn’t a huge issue. However, you can safeguard against this and a variety of other problems by naming a back-up or alternative heir.

10. Estate Planning Once and Never Again

This is the last, but not the least, of the most common estate planning mistakes. You did the work. The plan is in place. Now it feels like you are done. However, that’s not true. Your values, relationships, and assets all change over time. Therefore, your plan will have to change as well. As a result, you should work estate planning into your annual financial schedule. You do your taxes every April; you should do your estate planning once per year as well.

You should also update your plan after any major life events:

Births in the family
Separation or divorce
Marriage
Children aging into adulthood
Relocating to a new state where the laws may differ
Deaths in the family

The good news is that once you’ve set it up, updating it is usually much simpler. It’s just a matter of going through everything and making sure that it’s still the way that you want it. Then you’ll add in new information regarding any assets gained in the year since you last updated the plan. Moreover, you already know all of the most common estate planning mistakes to avoid, so you won’t have to worry so much about getting things right!

What do you do when a Family Member Wants to Contest a will?

November 13, 2015 By Guest Writer 4 Comments

What do you do when dad wants to leave everything in his estate to you but you know your brother is going to contest the will?

When a will is contested because family members don’t agree with how a family member’s estate is being parceled out, it can get ugly and very expensive – and gut wrenching to see the fight through to resolution. No one really wants to engage in that kind of battle, especially when you are grieving, but there are steps that beneficiaries can take now before their parent or other family member passes to preclude protracted conflict.

There are purposeful steps now that one can take to at least reduce the pain of the process later. First step is to have a will drawn. But, don’t make the mistakes that many others have made in getting Dad to do a new will. Here are some do’s and don’ts:

Don’t use your own attorney – suggest that your Dad hire his own attorney to draft his will; if your father has his own lawyer that does not also represent you, then use him or have him recommend the estate planning lawyer;

Don’t rely on the family attorney that could possibly be unduly influenced by family members who also have business affairs with him or her.

Don’t be in the room with your Dad if your other siblings are not when they are discussing the will. You never want to be accused of influencing the process.

Do suggest that the will signing be videotaped to demonstrate that Dad was of sound mind and judgement at the time.

Do suggest that dad say in his will that he is excluding someone from the will but do not say why.

Do take steps to include your brother in activities with your Dad. Keeping them apart is a hallmark indication of undue influence. Make sure that Dad includes your brother in invitations and even invite her to family functions that you are throwing.

Do make sure to remember that the will is just one part of the estate planning process. But many assets such as joint accounts go to loved ones outside of the probate process. Thus if there are joint accounts between your Dad and brother, remember to remind him to go to the bank or financial institution to change the designation. Of course, be certain not to attend or to drive him to the bank.

Do remember to check beneficiary designations as annuities, IRA’s and 401(k)’s pass to the designated beneficiary rather than through his will.

Do remember to make sure that the insurance is paid how your father would want. If he included your brother way back when, make sure he calls to have the change of beneficiary handled. Of course, don’t be on the call and don’t act as the witness on the change of beneficiary form.

Plan now to avoid the costly and challenging ordeal that would otherwise result from a poorly planned estate.

Jay J. Freireich, Esq. is a member of the wills, trusts and estates practice group at Brach Eichler LLC in Roseland, N.J. Contact him at jfreireich@bracheichler.com .

At The End of Your Life, You Aren’t Going To Want To Spend Money

November 26, 2009 By Jennifer Derrick 5 Comments

One of the biggest excuses that I hear for spending money you don’t have is that you might die tomorrow. “What if I’m hit by a bus tomorrow and I didn’t go on that vacation, or have that car, or own that bag?” The thinking is that it would be a shame to die without having had certain experiences or possessions and so overspending is justified in the face of mortality.

But I’ll tell you this: When you’re facing the real end of your life and not just looking for an excuse to justify your spending, the last thing you’re going to want to do is spend money. Too much else becomes far more important than “stuff.” I’ve spent six years volunteering in a nursing home and a hospital and the most common thing people near the end of life wish for is more time with their family. The only money involved in that wish is perhaps some travel expenses. What else do those who are dying wish for? Here’s the top ten list from my own, unscientific observations over the years.

More time with family: Even sick children ask for this one. And it almost never appears in the context of “more time with family on a big vacation.” People just want to spend time together talking or playing a game. They just want to be together and to feel that closeness.

To mend a family relationship: Be it mending a relationship with an estranged child or sibling, or getting to know distant relatives better, the desire to fix what’s broken is strong.

To see another season: Whether it’s spring, Christmas, or one more snow, people have a strong desire to see their favorite time of year just one more time.

One more healthy day: While this one is almost impossible to grant even with all the money in the world, a lot of dying people just want one more day when they could run, jump, and play without pain.

To finish something Whether it’s a book series, a quilting project, or a woodworking project, the desire to complete something and leave nothing unfinished is strong.

To straighten up affairs: I’ve seen people go to all kinds of lengths to make sure they don’t leave a mess behind when they die. They frantically rush to get wills and papers together, to transfer assets and to make certain that those left behind will have no trouble sorting everything out.

To see someone or something one more time: Maybe they want to see a long lost friend or a grandchild who lives far away one more time, or see their childhood home. Just once more they want to look at the people and things that mattered to them.

To be at home: No one wants to die in a sterile hospital or nursing home. Many people just want to go home and be in a comfortable and familiar environment at the end.

To go outside: Along with going home, many people have a strong desire to be outside at the end. They want to watch the sun rise and set, to see the birds, to smell the grass or watch the leaves fall.

Sex: I know it sounds strange, but you’d be surprised how many people want to make love to their partners just once more. It’s not even about the act itself as much as it is about the connection, the closeness, and the caring involved. It’s about the knowledge that they love and are loved.

Now, I’m not opposed to “bucket lists” – lists of things you want to do before you die – because they are not generally the same as overspending in the name of death. As long as your bucket list serves as a set of goals to strive and save for, it can be a positive thing that gives you great experiences throughout your life. A bucket list can be motivating and rewarding as long as you’re not spending irresponsibly in the pursuit of completing your bucket list. But I am opposed to spending money you don’t have on trips, clothes, toys, electronics, etc. on the theory that you or your children might die tomorrow. It likely isn’t true and you’re simply looking for an excuse to justify your purchases.

If you really believed you were going to die tomorrow, would you want that purse or would you want more time with your family? If you really believed that your life was almost over, would you really want to trek around the world, or would you want to mend a relationship with an estranged brother or sister? If you knew you were going to die in two days, would you really want to blow all your money on a plasma TV, or would you want to make sure the money was passed to your grandchildren?

What matters at the end of a life is very rarely anything material. It makes me angry when people justify overspending in the name of mortality because very few of these people have ever come close to death or even really contemplated their own mortality. They just parrot the “death excuse” as a way to justify themselves. When you’ve spent time amongst the sick and dying and you’ve really looked at your own mortality, you’ll likely have a very different, simpler wish list. And there’s probably not a big screen TV or a cruise on it.

How to Maintain Your Finances in Difficult Times

October 2, 2008 By Jennifer Touchette 2 Comments

When my mother died, I worried a lot about my father. How will he cope? What will he eat? Despite my worrying, I didn’t need to worry much about his finances. His forethought saved his financial life, despite our family’s terrible loss.

Dad always has been a stickler for details. This carries over into his bill paying and investments. During their marriage, he was the one who took care of the bills. He was the one who managed the income. He was the one who made sure they could afford their comfortable life.

Of course my father reeled from the loss of his wife. We all did. Mom and Dad’s lives had meshed together well from the time they started dating. They had a good life together.

Two years later, dear Dad is slowly piecing his emotional life together. During this time, it seems he has ignored his finances. In reality, he has been able to rely on advice from his trusted financial advisor and the clear, efficient way he managed their money before and after Mom’s death.

Deposit money electronically

I remember when the miracle of automatic deposit became a reality. Ever since its inception, Dad faithfully used it for both his and Mom’s paychecks. When they retired, they set up their Social Security and pension payments to be deposited automatically too. By never having to step foot in the bank to physically deposit a paycheck, it was easier for him (and Mom) to resist taking cash out.

Pay bills electronically

Dad was also an early subscriber to automatic payment. Every bill that could be paid through automatic withdrawal is paid from his checking account. This was a blessing in his time of grief: the money was deposited automatically, the bills paid automatically, and he could keep an eye on his checking account from time to time through the bank’s telephone banking system. Although one doesn’t want to make a habit of this, it was good there was one less thing Dad had to worry about during the first months without Mom. Dad is again taking care of his financial housework, which includes balancing the checkbook and tracking investments.

Get an advisor you trust

Dad’s financial advisor has been a family friend for years. Happily, she is also really good at what she does. With a lot of common sense, and a good feel for what amount of risk her client is willing to take, Dad’s advisor was able help him make the most of the money my mother left. This financial advisor helped reinvest my mother’s retirement portfolio to provide consistent income for my father, a plan that was way beyond what even my father – with his savvy saving and spending habits – could imagine.

Pay more than required

When my mother was sick in the last year of her life, the credit card bills and medical expenses piled up. Dad chipped away at these expenses during his first year alone by paying as much as he could to each creditor over the months. By paying more than the minimum required by the credit card company, he taught me that you can actually make headway on your bill. The next month’s bill has a chunk out of it so the interest is less. It is truly delightful to watch your bill shrink away.

Keep good records

There were also a lot of loose ends to tie up with insurance after Mom’s death. Final claims had to be filed, final bills paid – all that detritus had to be finished. This was not easy, but Dad had kept paperwork on the treatments, unreimbursed expenses and payments made by himself and the insurance companies. When there were questions, he was able to produce documents to provide the information. His tax preparer was able to use the paperwork on unreimbursed expenses on the taxes as well.

Share the hiding spots

Yes, it’s morbid, but when tragedy hits, it’s comforting for your trusted person to know where your will is stored, where the bank accounts are, what debts are outstanding, and where your important financial records live. If you’re a widow or widower, this is especially important. My parents took me on the tour every few years, and since Mom’s death, Dad continues to keep me apprised of where his finances stand. This includes where he keeps his credit cards to where he stores the safety deposit box key.

Update your will and beneficiaries

While you’re at it, make sure your will is updated. Do you have someone to take care of your children? Have you appointed an executor to be your personal representative? Is that still someone you want to represent you? It is also important to make sure the beneficiaries on any accounts are up-to-date. Families grow and change over the years, and your stated beneficiaries may need to change too.

There is so much to be done when tragedy hits. Unfortunately finances are one of those things that need to be monitored whatever happens. It makes a tragedy a bit easier to bear if one’s finances are set up well.

What The Wizard of Oz Taught Me About Finance

September 9, 2008 By Christina Pifer 4 Comments

The Wizard of Oz was a big deal when I was a kid. It only played on television once a year, and I made sure I didn’t miss it. Of course I didn’t realize it at the time, but this movie provides young viewers with solid examples of adult finances in terms a kid can understand.

Make sure you have a will

If the Wicked Witch of the East would have had a will, ownership of the Ruby Slippers would have never been in dispute. But then it would have been an awfully short movie, wouldn’t it?

Don’t overlook liability insurance

Dorothy is lucky that her house fell on a witch in Oz. If she still had been in Kansas, Auntie Em and Uncle Henry would have certainly been sued for the wrongful death of the witch. And since a house couldn’t have fallen from the sky without breaking at least a couple of yellow bricks, they likely would have been sued for property damage as well.

Greed makes you ugly

The Wicked Witch became completely obsessed with obtaining the Ruby Slippers and went to great lengths to get them. I think she became uglier as the movie went on until her greed turned her into nothing more than a melted pile of goo.

No one solution is right for everybody

The Tin Man, the Scarecrow and the Cowardly Lion were searching for different things. The Tin Man wasn’t on quest for a brain and the Scarecrow didn’t long for courage. Each of them had a goal in mind and a plan to reach it. Different people in the real world have different goals as well. Some people want to get out of debt, for example, while others may be trying to save for retirement.

Education is important

If Dorothy had known the power of the slippers when she first put them on, she could have returned home immediately. Instead, she had to learn what was truly important to her before Glinda would allow her to us the slippers’ magic.

Appearance matters for interviews

Before seeing the wizard, Dorothy and crew underwent thorough makeovers at the Emerald City beauty shops.

Money can’t buy friends

When Dorothy and her friends arrived at the gates to Emerald City, the doorman told them, “Nobody can see the Great Oz.” Doesn’t this make you feel sorry for the Great and Powerful Oz? He had all the money and luxury he could want, but he lived anonymously behind a curtain.

There is more than one path to your goal

The scarecrow instructed Dorothy to go in two different directions on the yellow brick road. I believe that it didn’t matter which path the duo took, because all roads ultimately led to Emerald City. In life, there are also many ways to achieve your financial goals. Sometimes you will invest in a mutual fund, and sometimes you will use coupons at the grocery store. Both of these roads, and many others, will lead you to your own Emerald City.

And all of this time you thought The Wizard of Oz was just a movie for kids.

(Image courtesy of Rita M.)