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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance.

How Your Home Should Factor in Estate Planning

How Your Home Should Factor in Estate Planning

By Britt Erica Tunick

For most people, a home is the most valuable thing they will own during their lifetime. So when it comes to estate planning, what becomes of your home after you have passed away is a crucial part of the picture, particularly if you have multiple heirs and the home you leave behind is the one where they grew up and have sentimental ties to.

When it comes to leaving your home to family members or friends, the way you choose to do so can have a major influence on how much money or value your beneficiaries will ultimately receive, as factors such as probate and estate taxes can be extremely costly, and can even leave family members with a hefty bill in certain situations.

Following are a few things to consider when it comes to determining how your home will factor into your estate planning:

  • If you have more than one child, it is extremely important to sit down with your kids—or other heirs— to outline what your plans are for your house and other assets. Failing to do so can lead to infighting at the time of your death if your children’s expectations differ from your will, or if they are not on the same page as one another, such as one child wanting to sell the home and split the proceeds, while another may want to live in the home themselves.
  • Depending on the terms of your mortgage, if your home is not paid off at the time of your death it could trigger a clause requiring the beneficiary who inherits it to immediately repay any outstanding debt. That could potentially mean the need to sell off other assets within your estate, or to take out a mortgage of their own. In a worst-case scenario, if your other assets aren’t sufficient to cover the outstanding debt and your beneficiary doesn’t quality for a mortgage of their own, it could necessitate the sale of the house.
  • Failing to outline what will become of your home at the time of your death will subject it to probate, which can be a lengthy and costly process. And don’t forget that identifying beneficiaries of your house in your will is not enough to shield them from probate.
  • You may want to consider putting your home into a trust, as doing so allows heirs to avoid probate and more quickly transfer ownership. But since trusts and the rules that govern them vary from state to state, it is important to involve both a financial advisor and a qualified attorney in such planning –especially if any title changes are necessary to meet your goals.
  • Don’t forget that inheriting a house comes with expenses and responsibilities, so it is important that heirs are aware of your intentions and are willing and capable of handling and or meeting any such needs –particularly if they choose to sell or rent out the home. Selling a home means a slew of taxes and legal fees that many people don’t think about when it comes to estate planning.
  • If a home is being left to multiple heirs, yet the plan is ultimately for one to live in it, there may be a better approach than equally dividing the home between those heirs. A beneficiary who inherits a home will receive a stepped-up basis, which is an adjustment of the value of the home for tax purposes based on its value at the time of your death, presumably resulting in lower capital gains taxes to that beneficiary upon a subsequent sale.