For many moderate and high net-worth clients, estate planning often focuses on the personal residence or family home. This can be challenging for a couple of reasons. Not only can the home be the biggest asset in the estate, but planning for ultimate disposition of the home often comes with significant emotional issues.
This could be the home in which the parents raised their children, thus holding many memories for the client. Or it could be a vacation home that has been passed down from generation to generation. Because of these considerations, planning surrounding a personal residence cannot be based solely on “numbers.” Additionally, the client should confer with independent tax and legal advisors regarding the planning techniques under consideration, as they will likely have valuable input.
Meeting the objectives
Financial advisors need to include these emotional issues in the discussion about the disposition of the family home and help the client formulate a plan that meets both financial and emotional planning objectives. Often, the client has already “mentally accounted” for the personal residence as the children’s inheritance and is reluctant to sell or move out of the home.
When evaluating disposition of the family home, the planning options can generally be broken down into the following strategies:
? Continue to live in the home and pass the home to heirs at death.
? Continue to live in the home and bequest the home to charity at death.
? Transfer the home to a qualified personal residence trust (QPRT) while alive.
? Transfer the home to charity while alive using a charitable life estate.
Pass the home to heirs at death
With this strategy, clients will own the home until they die and pass it to heirs via their will or living trust. The benefit is that the home will get a stepped up cost basis at death, thereby eliminating any capital gains tax on the increase in home value above cost basis up to the date of death. A potential drawback would be that the home will be included in the estate for purposes of calculating estate tax. For clients who have sizeable estates ($3.5 million for a single person and $7 million for married couple in 2009), the cost of federal estate tax, currently at 45%, needs to be weighed against the potential capital gains savings of the stepped up cost basis. Note: states may impose additional estate taxes as well. These state taxes (and the corresponding exemption levels) vary from state to state.
Pass the home to charity at death