What Homeowners Should Know About Estate Planning

If you have always thought estate planning was just for those nearing retirement or already retired, think again. If you own a home, it is important to have a plan in place. Without a will or other arrangements that allow your home to pass to your closest loved ones, it is subject to your state’s intestacy laws and probate, which may not result in the outcome you want. Here are five different ways your estate plan can pass your home on to your loved ones.

Give Your Home as a Bequest

One of the most common ways to pass a home along to heirs is by specifically naming a beneficiary in your will. When you leave your home in a will, the beneficiary receives a stepped-up cost basis. This provision means that if they later sell the house, they may only pay taxes on the difference in the value when they inherited it and the sale price.

Before choosing someone to inherit your home, be sure they are up to the task. For some, the idea of taxes, insurance, and maintenance expenses may feel like anything but a gift. And if the beneficiary is receiving public benefits, like Medicaid, inheriting a home or another item of value may make them ineligible for future benefits until these assets have been sold or spent.

Sell Your Home

If you would rather not leave your home as a bequest to your beneficiaries, another option is to sell it. With the $250,000 capital gains tax exclusion (or up to $500,000 for married couples filing jointly), you may sell your home for a tidy profit, deposit or invest the tax-free gains, and pass these funds along to your heirs.1

Gift Your Home

Another option is to pass your interest in your home as a gift to your beneficiary. You may do this by adding the beneficiary’s name to the deed or executing a legal document. If you want to continue living in the home during your lifetime, you reserve a life estate as a condition of the gift.

If the value of your home, and therefore the value of the gifted amount, is more than the gift-tax exclusion, you may owe gift taxes on the excess amount. Your beneficiaries do not benefit from a stepped-up cost basis in your home. Ultimately, leaving your home as a bequest in your will usually makes more sense than giving it directly as a gift.

Put Your Home in a Revocable Trust

A revocable trust is another tool that allows you to pass your home along to a loved one while managing your taxes. A revocable living trust allows you to control the house while you are alive. After you die, the home may then be sold, transferred, or otherwise disposed of according to the trust’s terms.

Transfer Your Home on Death

Finally, you may be able to transfer your home upon your death by using a transfer on death (TOD) deed. Upon your death, a TOD deed transfers the title of your home to someone you name in the TOD. It also allows the beneficiary to enjoy the stepped-up cost basis, providing a TOD deed with some advantages over a direct gift.


Topic No. 701 Sale of Your Home, irs.gov,


Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

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