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Should You Leave Your House to Your Kids in Your Will? Javascript must be enabled to use this site.
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Should You Leave Your House to Your Kids
Financial planners recommend answering these 5 questions before you decide
AlisaRut/Getty Images Your house, with its beautiful gardens, rows of bookcases and lovely keepsakes, is a treasure to you.
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It’s probably also your largest financial asset. You’d like to give it to your children when you pass on.
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Get instant access to members-only products and hundreds of discounts, a free second membership, and a subscription to AARP the Magazine. Many times, it’s not just a home’s emotional value that makes people decide to leave the house to their heirs.
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It’s a desire to , too. But is this a wise strategy? Oftentimes, yes, as long as everyone gets along, the house isn’t stuffed with 50 years’ worth of National Geographic and you don’t mind if the kids sell it immediately after the funeral.
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We talked to several certified financial planners (CFPs) with experience in estate planning and found five questions you should answer before you make the decision to leave the old place to the next generation.
1 Is the house worth something
As hard as it may be to believe in the current red-hot market, some houses are worth less than the owner paid for them.
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During the , home prices fell 27.4 percent, and homes languished on the market for months. If you recently moved to a more expensive home with a big mortgage, your heirs may owe more than the house is worth if the housing market declines, and may have to pay utilities, mortgages and taxes as they wait for the house to sell. The heirs don’t have to take the house, even if you will it to them.
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The mortgage debt is between the bank and the signers. If the house is worth less than the loan, the bank will foreclose and sell the house to recoup what it can.
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If the heirs want the house, they will either have to take on the mortgage payments or pay off the balance — something that probably won’t bring the happiness you envision. If you don’t want to leave the house, it’s probably a good idea to prepare them for what their options are when you die.
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Try to be considerate. “If they do decide to remain in their current home, they could take steps to put their home in order, before they pass,” says Gage Paul, a CFP in Hudson, Ohio. “They can begin , sorting family heirlooms and disposing of any junk.
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… This process could also prompt a discussion with the family about their intentions with the home and any instructions they would like honored.”
2 Do the kids want the house
In places where home prices are soaring, your children might very much appreciate inheriting your home. “Here in metro Boston, young families are being forced to look for affordable housing further away from the city — so if they can access housing via inheritance or affordable sales price, it is greatly appreciated,” says CFP Catherine Valega.
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“In my town, Winchester, Massachusetts, many children inherit their parents’ homes, or buy them from them at prices they could not afford on the open market, which is also a great strategy.” Entertainment $3 off popcorn and soft drink combos See more Entertainment offers > On the other hand, if your children are comfortably ensconced elsewhere, they may not want to move back home. Or they simply might need money more than they need your house.
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For many heirs, dealing with the clearing and sale of a house is a burden, especially if they live far away, says Rob Greenman, a CFP in Portland, Oregon. “There could be a as opposed to physical assets that don’t offer any income or liquidity properties,” he says.
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AARP Membership — $12 for your first year when you sign up for Automatic Renewal Get instant access to members-only products and hundreds of discounts, a free second membership, and a subscription to AARP the Magazine. , that would come due when ownership of the property changed?
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“Children are often surprised to learn of these,” says Patricia Hausknost, a CFP in Long Beach, California. “If they exceed the value of the home, it is better to let the first lienholder know of the death and walk away.”
5 What is the tax picture
Uncle Sam wants a cut when a house is sold for a profit.
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How much of a cut comes down to what’s called the cost basis of the property. Put simply, you are taxed on the difference between what you paid for the home and what you sold it for.
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But it’s not that simple. For tax purposes, you can also add the value of certain expenditures, such as major renovations, to the purchase price of the home to increase your cost basis and in turn reduce the amount of profit you’d owe taxes on.
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Confused? The IRS has lots more on .
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Heirs get a break on cost basis. Under current law, , they get what’s called a step-up in basis, meaning that their cost basis for taxes is as of the date of their parents’ death or the settlement of the estate.
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In other words, if they sell the house, the heirs won’t have to base their capital gains tax on what their parents paid for the house. Suppose the parents bought the house for $50,000 in 1980 and the house was worth $319,200 the day the estate was settled.
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The heirs would have no profit on the house if they sold it immediately, and therefore no capital gains taxes due. AARP Membership — $12 for your first year when you sign up for Automatic Renewal Get instant access to members-only products and hundreds of discounts, a free second membership, and a subscription to AARP the Magazine.
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More on money AARP Membership — $12 for your first year when you sign up for Automatic Renewal Get instant access to members-only products and hundreds of discounts, a free second membership, and a subscription to AARP the Magazine. AARP VALUE & MEMBER BENEFITS See more Health & Wellness offers > See more Flights & Vacation Packages offers > See more Finances offers > See more Health & Wellness offers > SAVE MONEY WITH THESE LIMITED-TIME OFFERS
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