Home prices are on the rise, and if you live in California, you may already view your family home as a long-term investment—an appreciating asset or, perhaps, a gift for your children. If you wish to pass on your home to the next generation, you should consider which succession strategy works best for your family’s circumstances.
Your Strategies for Passing on the Family Home
California provides responsible homeowners with several strategies to pass on their family home, including:
You might be able to make your children co-owners, or joint tenants, of your home. Co-ownership can help your family avoid probate. However, co-ownership is not without risks. If another joint tenant incurs debt, gets divorced, or runs into financial trouble, their share of the home could be seized by creditors.
A Revocable Living Trust
Trusts are a preferred way to pass on homes, real property, and other valuable assets. When you establish a revocable living trust, you transfer control of your assets to the trust. However, you can retain control over these assets while you are still alive and cite how they should be used and disbursed once you pass away. Revocable living trusts help keep your family safe from probate and have less risk than co-ownership arrangements.
Qualified Personal Residence Trust (QRPT)
A QPRT lets you transfer your home to a beneficiary with reduced gift taxes. If you form a QRPT, you immediately transfer control of your home to the trust. However, you will enjoy full use of the home and its facilities for the duration of the trust’s term. Once the trust expires, the home will be given to the beneficiary.
A beneficiary designation, or “transfer-on-death” (TOD) deed, automatically transfers your home to a selected heir upon your death. While TOD assets avoid probate, they have some drawbacks. TODs, for instance, must be updated every generation. They also cannot be conditioned. If you die young or unexpectedly, your underage child may be forced to maintain your home and pay taxes—an impossible situation for many families.
Understanding the Tax Implications of Intergenerational Home Transfers
Although California provides residents with many strategies to provide a home as an inheritance, these strategies can have marked downsides if they are implemented without a professional’s guidance. Consider:
- If an irresponsible co-owner accrues substantial debt, their creditors could seize the tenant’s share in the home.
- A QPRT will not reduce a beneficiary’s gift tax obligation if the original owner dies before the trust’s term ends.
- A TOD deed does not “skip” generations and must be updated by every new owner.
- Any home that is not held by a trust could inflate a dependent child or dependent adult’s net worth, depriving them of government benefits they may need to survive or live independently.
- Changes to state taxation laws make it more difficult to keep appraisals and taxes low when transferring real property to a child or grandchild. The recently approved Proposition 19, for instance, could erase tax benefits for home-inheriting children who do not plan to live in their family home.
Do You Need to Speak With an Attorney About Estate Planning?
If you need to speak with an experienced estate planning lawyer, please contact us online or call us directly at 800.756.5596 to first register for one of our free, informative seminars. Your attendance will qualify you for a special discount for our estate planning services should you decide to make a free appointment at the conclusion of the seminar and choose to proceed with us. We proudly serve clients throughout California with offices in Torrance, Newport Beach, Orange, Woodland Hills, and Pasadena.