Transferring assets to family members and heirs is an important part of estate planning. Dealing with your parent’s home can pose additional complications and impact estate administration and probate.
If nothing is done, an estate and the parents’ home will undergo probate. A probate court will appoint a representative to act on the estate’s behalf and likely serve as executor of the will. That person may sell estate assets, close accounts, withdraw funds from accounts and deal with the Social Security Administration and IRS.
Probate attorneys will handle court documents, attend court proceedings, and deliver a final accounting after the estate assets were disposed of and the executor’s duties are completed.
If the home has substantially appreciated, you may choose to keep it in your parent’s estate to reduce any taxes from its sale after your parents die. Current tax laws exclude $250,000 in profit from the sale of the home if its owner lived in it for two of the last five years.
If the home remains in your parent’s estate, their children will inherit it at its stepped-up basis. For estate tax purposes, the home’s value will rise to the current market value at the time of the parent’s death and will not be valued at the lower price that the parents paid.
The IRS will view the home as gift to the children if a parent signs a quitclaim deed for the home for their children. The parent’s cost basis in the property, what they paid for the home and any material or structural improvements, will be transferred to the children.
In this situation, however, the children will be ineligible for the $250,000 tax exclusion when the house is sold. The children may have to pay federal income or capital gains taxes and other taxes when the house is sold.
Trusts and joint property
Other mechanisms may avoid probate costs and delays. Holding property jointly, even if this is not used to pass the home to the children, allows property to pass to the joint owner without probate. Setting up a trust and titling assets to the trust passes its assets automatically to trust beneficiaries.
An attorney can help prepare an estate plan that meets your and your family’s needs. Lawyers can also assist personal representatives and executors in the estate probate and administration process.