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One easy option for heirs to inherit the familial home

I was standing in line at the post office yesterday and struck up a conversation with a woman about how her father's new wife wanted to leave this woman her out-of-state home but did not know how to do it. It got me thinking of how for most, our homes are the biggest asset we have. Unless there is proper planning, the heirs can fight (bitterly) about what should happen with the family home. This is not to mention the of so fun process of dragging the house and other assets through probate court. Below is one easy option for heirs to inherit the familial home.

Life Estate - A life estate is a deed that entitles you to remain in your home for the rest of your life and allows your designated heirs to inherit it without the hassle of probate-court proceedings when you die. All they have to do to take possession is present your death certificate at the county courthouse.

It should be noted that a life estate only covers real estate, not any other assets.

There are downsides for a life estate, namely:

Giving Up Control

One drawback of a life estate is that it limits your flexibility. You can't sell your home or change the heir or heirs without the consent of those named in the life estate.

Assuming you're certain of your intentions, a life estate has some advantages for your heirs apart from avoiding probate. For one, they will inherit the property at its "step up" value—what it is worth when you die, not when you bought it. That reduces or eliminates any taxable capital gain if they decide to sell the home, either immediately upon inheriting it or later.

In many states, a life estate also protects your heirs from Medicaid liens. People whose long-term-care costs deplete their resources to the point where they become Medicaid-eligible, despite owning their own homes, can keep their house in most cases and still receive benefits. Life estates usually protect the heirs, too, though several states have moved to end this exemption.

Tax Issues

There can be some tax caveats, particularly if you have owned your home for many years and it has appreciated by more than the $250,000-per-owner federal capital-gains exemption allowed for a primary residence.

If, in those circumstances, you change your mind after establishing a life estate and decide to sell your home before you die, you would be allowed the $250,000 exemption on the portion of the property deemed to be yours as stipulated by Internal Revenue Service actuarial formulas. Your designated heirs, known in a life estate as remainder owners, would be allowed no exemption on their portion, unless your primary residence is theirs too.

For most people, though, neither capital-gains nor inheritance taxes are likely to come into the picture. You may be charged a transfer tax when the life estate is established.

Before you make a decision of what to do with your home, it is best to contact an experienced estate planner. Click here to contact Berdugo Law to find out if a life estate is best for you and your situation.