In the world of estate and financial planning, the question of how to pass on family property to heirs or beneficiaries as part of an inheritance plan often arises.
The truth is that leaving real estate to future generations can be an emotional topic. The property in question perhaps holds nostalgic or sentimental meaning, whether it’s a family home or maybe a vacation getaway that has been in your family for decades. When you’re writing your estate plan, it’s likely you consider the property a valuable or cherished asset, and ideally it’s safe to assume your heirs will feel the same way.
But what if your children or grandchildren aren’t as attached to the property and don’t necessarily want to inherit it? And what are the financial implications of putting property in your estate?
Let’s dig into the key considerations for leaving real estate as part of a legacy, and how to ensure it’s a best-case scenario for both you and your family.
Why Pass Down Property?
You may want to pass property on to your heirs for many reasons. As discussed, it could hold emotional and sentimental value that defines your family’s history. Passing it down can be a way to preserve those connections across generations.
Alternatively, you may feel that real estate is the most significant asset in your portfolio, therefore making it a crucial part of your financial legacy. Providing beneficiaries with property can potentially offer them a stable financial foundation to build on. They can then explore the opportunity to utilize it for generating income, or simply have it serve as a valuable asset in their own portfolio.
There are also several strategic tax moves you can make when passing property on as part of your legacy. This can further help your family members build wealth, whether they choose to keep the property or not.
Passing On Property for Emotional Value
If your primary goal for passing on property to your children or grandchildren is to preserve the legacy of memories shared there, and give them a space to make their own in years to come, it’s important to loop in your family members before finalizing this decision.
Recent reports have shown that nearly 70% of those who have inherited, or plan to inherit, their family home intend to sell it. With rising housing costs and potential tax savings that come with inheriting real estate, this may be the best financial decision they can make – regardless of how attached they feel to the property itself.
Having a conversation with the beneficiaries who stand to inherit the property can clear up any questions about intention. Here are a few pointers to get you started:
- Be clear on your ‘why’ before going into the conversation. If you want to pass on the property because you believe it is financially valuable, that’s one thing. If you have an emotional attachment to the property and desire for it to stay in the family, that’s another thing entirely. Be honest with yourself about your intentions and how you want your legacy executed.
- Ask your family members what they want – and expect they’ll need time to consider their answer. Your family may have an emotional attachment to the property, while also recognizing it’s not a good lifestyle or financial decision for them. Relocating there, or managing the required upkeep from afar, may not be options that are possible in their current circumstances.
- Outline a Plan B. If your heirs indicate that they intend to inherit and sell, give yourself time to process this before moving forward. If you decide you’re uncomfortable with that understanding, you do have other options available to you. For example, placing the property into a trust can help pass it directly to your family while also avoiding probate. This gives everyone a degree of privacy to determine the next best steps, as assets in a trust aren’t public domain. Alternatively, you may decide to donate the property, sell it yourself and use the funds to pad your estate plan, or any number of other strategies that don’t require your family members to participate in deciding the final outcome.
If your family is interested in inheriting and maintaining the property, make sure that you have conversations about how this impacts the equitable distribution of your estate among your beneficiaries. For example, if your oldest daughter is attached to the family home, you may give the rest of your (more liquid) assets to your youngest son because the property’s value is equal to or greater than the rest of your estate.
Open and transparent communication among family members is critical. Discussing intentions and decisions regarding property inheritance can mitigate potential conflicts and ensure you all understand what is happening. As long as everyone is as comfortable as possible and clear about the logistics, you can create a supportive plan that works for you and your family.
When Real Estate is the Biggest Part of Your Estate
When property constitutes a large portion of your wealth, its impact on your overall estate planning, and the subsequent distribution of assets, can be substantial.
Here are several considerations for when real estate is the most significant part of your legacy:
- Probate. If your estate goes through probate, the value and distribution of property assets will be subject to the probate court’s supervision. Probate is a legal process that validates your will, settles debts, and distributes assets. Real estate in your name alone may go through probate, which can be time-consuming and incur additional costs.
- Taxes. The value of your property can contribute to the total taxable value of your estate. Depending on the jurisdiction and the size of your estate, you may be subject to estate taxes. Consulting with a financial advisor and estate planning attorney can help you explore strategies to minimize potential tax liabilities.
- Trust Planning. Placing your real estate assets into a trust can help avoid probate, providing a smoother and more private transition to your heirs. Trusts also offer flexibility in specifying conditions for distribution, allowing for a more tailored approach to meeting your estate planning goals.
- Liabilities. If your property carries mortgages or other liabilities, these should be considered in the overall valuation of your estate. Your estate may be responsible for settling outstanding debts related to the property.
- Property Management. If you own multiple properties, be sure to account for how they will be managed after they are passed on to your family.
Especially when real estate represents a significant part of your wealth, estate planning requires careful consideration and professional guidance. Consulting with an estate planning attorney and financial advisor can help you develop a comprehensive plan that addresses your unique circumstances and goals.
Tax Strategies When Property is In Your Estate Plan
Property can be subject to various taxes in an estate plan, and the tax implications can vary based on factors such as the estate’s value, the type of property, and the jurisdiction. Let’s explore some important things to keep in mind:
Inheritance and Estate Taxes
While the federal government doesn’t implement an inheritance tax on property, some states do. For example, Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania all have inheritance taxes. Some states, like Maryland, also have an estate tax that’s removed from an estate before it passes to the beneficiaries. Additionally, even though there isn’t an inheritance tax at the federal level, there is an estate tax. If your estate is over $13.61 million in 2024, it could be subject to an 18-40% estate tax.
Stepped Up Basis
Typically, when you sell your home you are responsible for capital gains taxes on the profit you’ve made. In other words: you’re taxed on the difference between what you sell the home for and what you initially paid. However, when you pass your home on via your estate plan, your beneficiaries can take advantage of a “stepped-up basis” loophole. This means the value of your home “resets” the day of the property ownership transfer, reflecting whatever its current value is rather than how it was valued when you initially bought it.
This is especially helpful for beneficiaries who inherit property that’s been in a family for decades. For example, if you bought your small family vacation home for $60,000 in the 1980s, and it’s now worth over $500,000, you’d owe capital gains on a significant amount of profit if you sold it yourself instead of including it in your legacy. However, if you leave your home in your estate, your heirs will benefit (from a tax perspective) by having that property value “reset” to the current $500,000+ valuation. When and if they choose to sell, they’ll only owe taxes on the difference between the selling price and the $500,000+ valuation.
This is a win for parents who want to pass on their family property to help give their heirs a financial advantage. Whether or not your beneficiaries choose to keep the property, they can avoid a tax burden and create lasting wealth for themselves and future generations.
Building Your Team
Passing down property is a multifaceted decision that requires careful thought and planning. By considering emotional, financial, and tax-related factors – and fostering open communication – you can create a legacy that aligns with your values and provides for the well-being of your beneficiaries.
Remember, consulting with a qualified financial advisor can help to navigate the intricacies of property inheritance and estate planning. If you have any questions or need personalized guidance, the Abacus team is here to help. Reach out for a call today to learn more about creating a legacy that lasts long into the future.
Sources:
Johns, Joseph. “Estate and Inheritance Taxes by State, 2024.” Tax Foundation. 12 Nov. 2024
White, Jeff. White, Marie. “All About the Stepped-Up Basis Loophole.” Smart Asset. 5 Dec. 2024
