Whether a highly appreciated home should pass outright to your children or remain in a continuing trust after you’re gone depends on your family circumstances and what you want to accomplish — it isn’t an automatic decision. Many parents simply provide that after they’re gone, their living trust distributes everything outright, directly into the names of their children. But with a highly appreciated home or other valuable real estate, it may make sense to consider whether the property, or the proceeds if it’s later sold, should instead remain in a continuing trust for a child’s benefit.
Table of Contents
- Why Keep an Inheritance in a Continuing Trust Instead of Distributing It Outright?
- How a Personal Asset Trust™ Can Preserve Both Control and Protection
- Tax and Practical Issues That Affect Highly Appreciated California Real Estate
- Build Your Plan Around Your Property, Not a Default Outcome
- Frequently Asked Questions About Passing an Appreciated Home to Children
- Plan Your California Real Estate Around Your Family’s Needs
Why Keep an Inheritance in a Continuing Trust Instead of Distributing It Outright?
Keeping an inheritance in a properly designed trust can provide important protections that may be lost if the property is distributed outright. For example, a continuing trust may help protect an inherited home from a child’s:
- Future divorce
- Lawsuits
- Creditors
- Poor financial decisions
- Outside influence
A properly designed child’s trust does not necessarily mean your child must have limited access to, or lose control over, their inheritance.
How a Personal Asset Trust™ Can Preserve Both Control and Protection
At Kavesh, Minor & Otis, we use a special kind of trust known as a Personal Asset Trust™, which can give a child substantial control and flexibility over an inherited home while still preserving valuable protections against divorce, creditors, and lawsuits. This approach is designed to give a child the practical benefits of ownership without exposing the inheritance to the same risks as an outright distribution.
Tax and Practical Issues That Affect Highly Appreciated California Real Estate
There are also important tax and practical issues to consider when an inheritance includes highly appreciated California real estate, including:
- Proposition 19 and property tax reassessment
- Capital gains taxes if the property is later sold
- Potential federal estate taxes
- Whether a child intends to live in or sell the home
- Whether multiple children will inherit interests in the same property
All of these can affect the best planning approach for a given family. Learn more about including California real estate in your estate plan.
Build Your Plan Around Your Property, Not a Default Outcome
Rather than automatically directing that a home pass outright, your estate plan should be designed around your particular property, your children, and what you want to happen to the property after you’re gone. A living trust that gives your successor trustee the flexibility to allocate a residence to one child while equalizing shares with other assets, for example, can avoid forcing an immediate sale or an awkward, fractional co-ownership among siblings. Learn how a living trust can help with Proposition 19 planning when more than one child is involved.
Frequently Asked Questions About Passing an Appreciated Home to Children
Does a highly appreciated home have to pass outright to my children?
No. While many living trusts distribute assets outright, a highly appreciated home can instead remain in a continuing trust for a child’s benefit, preserving protections against divorce, creditors, lawsuits, and poor financial decisions.
Will my child lose control of the property if it stays in trust?
Not necessarily. A properly designed trust, such as a Personal Asset Trust™, can give a child substantial control and flexibility over the inherited property while still preserving important protections.
What if only one of my children wants to keep the family home?
This is a common situation. An estate plan can be designed to allocate the residence to the child who will occupy it, using other assets — or refinancing proceeds — to equalize what the other children receive.
Does Proposition 19 affect how I should plan for my home?
It can. Proposition 19 may trigger a property tax reassessment when a home passes from parent to child, which is one of several reasons the decision to distribute a home outright or keep it in trust deserves careful, property-specific planning.
Plan Your California Real Estate Around Your Family’s Needs
Deciding whether an appreciated home should pass outright or remain in a protective trust is a decision that should be built around your specific property, your children’s circumstances, and your goals — not a default trust provision. Kavesh, Minor & Otis helps South Bay families weigh these choices as part of a comprehensive California estate plan. For more on the property tax issues involved, download the free report, What South Bay Homeowners Should Know About Proposition 19.
