For financial and emotional reasons, our homes often are the most valuable asset we own. Buying a home, making it your own, and enduring the ritual of paying down a mortgage are significant life events. Homes play prominent roles in our later lives as well, and are a core source of wealth and a financial safety net for millions of retirees.
For those able to preserve this asset throughout their lives, homes also play an important part in how people think about their legacy and estate plans. Yet for all the work we do to acquire and maintain our homes, we often don't devote very much time to figuring out the best ways to pass on this asset to our heirs.
Here are four common ways to include a home in your estate plans. They all use different forms of what's called a revocable trust. This is the legal name for what can be a very simple and affordable planning document. As its name implies, a revocable trust can be changed any time you wish during your life. Once you die, its provisions become irrevocable and will be there to carry out your wishes. And the trust should exempt any conveyed assets from being caught up in probate—a time-consuming, potentially expensive, and publicly reported process for resolving certain kinds of estate issues.
"Revocable trusts in general are trusts that really define and express the grantor's intentions of where and how they want their assets to pass upon their deaths," says Michael Passananti, an estate planning attorney in Chicago with the Duggan Bertsch law firm. "It can be as detailed or simple as the grantor wants," he adds, "and it will allow any of their assets, including residences, to pass free of probate."
"One of the misnomers regarding revocable trusts is that everyone thinks of trusts as only being for the wealthy," Passananti says. "But trusts can be for any economic class. They not only are easy to administer but can provide for a very detailed expression of a person's wishes."
"Revocable trust planning could start out for as little as $500," he explains, "and range upwards of $2,000 to $3,000. That should include all the documents that are needed."
Passananti pointed to four types of revocable trusts that homeowners can use in their estate plans. Before entering into any of them, or any other binding commitment, make sure you've done your homework. This includes considering the financial impact—including income, estate, and property-transfer taxes—of disposing of your home.
1. Legacy provisions. This revocable trust will allow the residence owner to define how the home will be preserved into the future and possibly into perpetuity. It could transfer the house to one or more family members, for example, with instructions that the home is never to be sold or must stay within the family under certain terms. Such a trust will continue to exist after your death and your appointed trustee will have continuing obligations. You can provide the trustee with broad discretionary powers or very detailed instructions. You can leave behind money to help fund the property's preservation, or leave it to your heirs to do so. "There's options upon options upon options," Passananti says. Legacy trusts are commonly used with treasured family vacation homes, where there has been common support for having a "family compound" that would be used by successive generations.
2. Specific bequests. The trust will convey the property to specific heirs, and the costs related to the real estate are then the responsibility of its new owners. If you're thinking of giving your home to multiple children, Passananti advises, be mindful about the possible friction it may create if multiple siblings have to agree on what to do with the home. It may be easier to simply instruct the trust to sell the home and provide the proceeds to your heirs. It's not uncommon, he adds, for such bequests to include a provision allowing a surviving spouse to stay in the home until they die or move out, and then convey the home to children or sell it.
3. Charitable intentions. This trust is like a specific bequest, except the beneficiary is a charity. The trust can convey the home or instruct the trustee to sell it and donate the proceeds to the named charity. The trust also could include provisions to allow a surviving spouse or other family members to use the residence for a period and then convey it to the charity.
4. Options provisions. If you'd like to keep your home in the family, this trust gives a named heir the option to purchase the home and, if he or she declines, this option is then conveyed to a second named heir and so on. "These options can keep going down to other children or descendants," Passananti explains. If no heirs are interested, the trust "could include the option to donate the home to a charity or sell it and distribute the proceeds to heirs." He notes that IRS rules require any inter-family transactions to be at fair market value.