Often, your greatest financial asset is your home. You’ve spent years carefully investing, upgrading and creating family memories. When you own real property, carefully consider what type of legacy you want to leave for your children. There are different ways of handling leaving the family home as opposed to investment property and careful planning is important to insure the next generation carries out your wishes. Seeking the advice of a qualified professional is important, but here are some ideas to consider to get your started.

Basic Inheritance

Leaving property to your children in your will has both positives and negative aspects. While financial planners and your attorney may baulk at the idea due to the challenges of the probate system, a well-crafted will may prove to be a good option from a tax-burden perspective. This is particularly true in states with no, or minimal, inheritance taxes, or those that only tax properties valued above six figures. If you choose to manage your estate through your will, however, be aware of the federal tax rules regarding estates. In general, a 35 percent tax is assessed on all assets (combined) above five million dollars. If you are married, however, the surviving spouse is given an unlimited marital exemption and the estate is taxed after the second spouse dies. Note: If either spouse is a foreign national, different rules apply.

In order to mitigate the impact of the inheritance tax, you should plan to leave liquid or cash assets to cover the tax burden. Otherwise, your children might have to sell the property in order to cover the tax. Life insurance and using a trust are two options to explore in this regard. Only an irrevocable trust allows assets to entirely avoid estate tax, but require that you give up control of the property to be sure to have all the information before entering into an irrevocable trust.

Gifting the Property

Transferring ownership while you are living, or adding their names as joint owners to the title of your property may provide some benefits, but there are pitfalls as well. For example, when transferring or gifting the property directly to your children, you may trigger transfer taxes. These taxes are due even if there is no exchange of cash. In addition, the portion of the property passed on after your death may still have inheritance tax due. If your home has a mortgage, gifting may not be possible unless the mortgage is assumable. Many investors consider Philadelphia real estate for sale when looking at estate planning.  For non-assumable mortgages, the act of gifting can trigger a “due on sale” clause that makes the loan balance due at once. Another aspect to be aware of is that the portion of the asset you have gifted to your child may make their children ineligible for certain educational grants and loans. The impact and implications of transferring or gifting require considerable forethought.

Revocable or “Living” Trust

A revocable living trust is a financial planning instrument in which you transfer ownership of your assets throughout your lifetime into the trust. As trustee of your trust, you retain control over the assets (purchases, sales, mortgages, etc.) while you are living. Because it is “revocable” you may continue to make changes to it up to and until it is passed on to the next trustee(s). Advantages include the ability to separate property acquired prior to marriage, avoid probate, minimize challenges to your will and preserve the privacy of the estate. However, there are also disadvantages, such as the requirement to re-title all property into the estate, administrative expenses and document expenses and the need to continually maintain and update the trust’s books and records. Also, a living trust does not always address certain property such as family heirlooms or other personal wishes, so you should also have a will to address those items.