Whether or not you own your personal residence with a spouse, there always exists the potential that a non-spousal heir could end up with it. Because we really don’t know what the future holds, it is important to decide what should happen if something happens.
If you avoid this question, consider what could happen. A minor could end up with the house. Your family could end up owning it jointly without an ability to pay down the mortgage. Worse, your personal representative may be forced to sell the home and its contents for pennies on the dollar during a poor economy.
Fortunately, many potential solutions exist. In fact, it will take two posts to cover 27 ideas that involve estate planning. While none of these choices are “easy” to implement, today’s list of 13 includes perhaps the relatively inexpensive and less complex options. Remember that the purpose here is to trigger ideas and educate you towards making the best possible decision for your situation.
In this attempt at brevity on this important topic, please excuse my use of the abbreviation “PR” in the place of “personal residence” in the two posts. Also, for goodness’ sake, be sure to speak to a professional before implementing any of the choices below!
Without any Estate Planning
- Joint Ownership
- Married – For the PR to pass automatically to a surviving spouse, married couples can own it as “joint tenants with a right of survivorship” (aka “JTWROS”), as “community property”, or as a “tenancy by the entirety”, depending on state law.
- Unmarried – An unmarried or widowed owner can ensure that the PR automatically passes to an heir by naming that person as a JTWROS during the owner’s lifetime.
- Giving an heir half of your PR should be reported to the IRS since it is a gift exceeding the annual gift tax exemption of $13,000.
For Minor Heirs Only
Since minors cannot own a PR outright, any PR gifted to the minor must be held in one of the following types of accounts or trusts that are supervised by a custodian or trustee:
- UTMA Account – Most states have enacted a Uniform Trusts for Minors Act (UTMA) that allows an adult custodian to hold a PR on behalf of a minor in an “UTMA account”. However, note that the minor will then be entitled to own the PR outright by age 21.
- 2503(b) Trust – Under the Internal Revenue Code Section 2503, gifts to a minor may also go into trust for the minor’s benefit. A trust under Section 2503(b) can hold a PR and other assets well after the child turns 21, as long as it pays trust income to the child at least annually.
- 2503(c) (aka Minor’s) Trust – Alternatively, a Section 2503(c) trust does not require an annual income payout, but it does require full distribution of the trust assets to the child by age 21.
Note that these three choices are exclusive to minor heirs. Other trusts discussed below and in the next post can also be used for minors, but are also available to adult heirs as well.
Transfers by Will
The owner can gift the PR by will to one or more heirs if there is no other owner. Here are the different distribution methods:
- Testamentary Gift– The owner can leave a testamentary gift (i.e. by will after the owner’s death) directly to one or more heirs.
- Testamentary Trust – Instead, the owner can leave the PR to one or more heirs in a testamentary trust (i.e. established after the owner’s death).
- Life Estate – The owner can leave the PR to an heir for that heir’s lifetime (the “life estate”), and then direct that a different heir be given the PR thereafter (the “remainder interest”).
Transfers by Trust
A PR transferred into a revocable trust during the owner’s life or into a testamentary trust creates greater flexibility. For example, a trust can disperse a PR in the following ways:
- In Stages – As in one-third shares to the heir at ages 25, 30 and 35.
- Conditionally – Upon the satisfaction of a condition, such as completing college.
- For Life – If the trust owns the PR while the heir lives there, it will be better protected from the heir’s creditors.
- Generation-Skipping Trust (aka Dynasty Trust) – This trust can hold the PR for multiple generations (i.e. for decades or even hundreds of years) before it is given outright to any descendant. The maximum number of years is determined by state law.
As discussed, stay tuned for 14 more advanced methods in the next post.
- Gifts of Real Estate really are Gifts – and the IRS is looking for them (njelderlawestateplanning.com)
- Uniform Transfers to Minors Act (epilawg.com)
- An Introduction To Dynasty Trusts (Part 2 of 2) (deathandtaxesblog.com)