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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.

Things to Consider When Passing Real Estate on to Heirs

Things to Consider When Passing Real Estate on to Heirs

By Britt Erica Tunick

For many people, real estate is their most valuable possession, both monetarily and sentimentally. Whether it is a primary residence where couples raise families and eventually entertain grandchildren, or a vacation home where friends and family members routinely gather, real estate is typically a major part of the assets that most people ultimately pass along to their heirs. So, it is important to determine what will become of any real estate holdings you own long before they change hands, as failing to do so can not only cause significant rifts between family members, but it can also prove costly to your heirs.

When it comes to passing along real estate, there are several things to think about—from whether you want to wait to pass it along once you have died or while you are still living, to how it will ultimately be transferred. Following are a few of the ways to do so and some of the biggest things you should know about each:

  • If you are considering gifting real estate to a child/children while you are still alive, a popular way of doing this is through an irrevocable trust. Just keep in mind that putting a property into a trust means you no longer own it yourself or have any control over it. Nonetheless, there are still instances where this makes the most sense—such as if you or a spouse are seeing early signs of a degenerative illness that could necessitate a long-term stay in a nursing home and will require Medicaid coverage. Since Medicaid will only cover such care after your assets have been spent down to a certain level, real estate ownership must transfer to a child more than five years before you need Medicaid or the government can seek to recoup those assets from your heirs.
  • Another type of trust that can be used to pass property along to heirs is a Qualified Personal Resident Trust. Once again, ownership of the home passes to the trust, but there are ways to set up this sort of vehicle so that you can continue to live in the home for the duration of the trust and then pay your heirs rent if you live beyond that time.
  • Sometimes people use what is called a quitclaim deed to sign over property to a loved one and circumvent the closing process. But while this is a quick way to easily transfer ownership of real estate, it comes without warranty protections, and is something you should discuss with a financial advisor first.  
  • Selling property to a child is another popular way to pass on real estate, particularly for families that have multiple children where one wants to live in the home and issues of “fairness” could creep in. In order to legally sell real estate to children, it must be sold at what is deemed to be the “fair market price,” as a sale for any value below that will be viewed as a partial gift and is likely to have tax ramifications. One way to circumvent this is to lend children the funds they need to buy the home, although there are rules related to such lending as well. If you are looking to go this route, you should talk to a financial advisor or tax expert to find out any steps you should take to avoid unintended tax implications.
  • Leaving real estate to heirs after you are gone can be done multiple ways. One option is to use a deed transfer that passes the property on to your heirs once you are gone without the need to go through probate. The rules related to taking this approach vary among states so, again, make sure to speak with a financial advisor or tax specialist before going this route.

Whatever you decide to do with any real estate you own, make sure to discuss your plans with your heirs before implementing anything to make sure you are all on the same page. These days, many younger generations prefer city living to owning large homes in the suburbs. Knowing what your heirs ultimately want should be the first step in planning what to do with real estate holdings.