If you’re like most Americans, your home is by far the biggest purchase you’ll ever make. It’s also the single most valuable asset you own. If you live in California, that’s especially true – the average home value statewide is a staggering $744,280, according to real estate giant Zillow. As a homeowner, a significant amount of your net worth is likely tied up in your house.
However, the monetary value of your home is far from its only worth. It’s also the place you return to at the end of the day, where you raise your children and many of your fondest memories are made. That’s why deciding how you want to handle your house in your estate plan is so important.
What Happens to a Property When the Owner Dies?
A house is typically a significant portion of a person’s estate. When someone dies with a net worth of more than $166,250 in California, their estate must go through probate, including any real estate they own. The probate process looks different depending on whether the decedent had a valid will or died “intestate” (without a will).
The first steps in both processes are similar. The court either recognizes the executor in the will or names another administrator. This representative investigates the decedent’s estate to identify and appraise all assets and outstanding debts. They then use the assets to pay the debts. This is the first point at which a property may be affected – if the obligations outweigh the liquid assets, it may be necessary to mortgage or sell the house to cover them.
The probate processes diverge if the house is still part of the estate when the debts are paid. If there is a will, the estate representative will follow its terms regarding the transfer of the house. Otherwise, they will follow California’s intestate succession rules to determine who should inherit the property. However, the succession inheritance rules may cause disputes as potential heirs disagree about managing the property. As such, it is always preferable to have a will in place.
Considerations for Real Estate Inheritance
If you’ve decided to write a will, you’re on the right track to protect your home after you’re gone. However, passing on real estate is more complicated than handing down a family heirloom. To reduce the risk of probate disputes, you should consider the following questions:
- Does anyone want the property? If your children have moved far away or already have houses they love, they may not want to move into the family home. Talk to your prospective heirs about their preferences so you don’t leave the house to someone who doesn’t want it.
- Do they have the means to care for it? A house takes time and money to maintain. The larger and older the property, the more work it takes. If the property requires significant repairs or restoration, you may pass on a financial burden instead of a gift.
- Do you have a plan to cover due-on-sale clauses and other debts? If your home has a mortgage, it is likely subject to a due-on-sale clause if ownership is transferred. The entire balance of the mortgage comes due at once. Have a plan to cover this balance and any other extant debts to avoid causing your heirs to owe money.
- How will you protect the property if you need Medicaid care? Similarly, if you receive Medicaid care before death, the Medicaid agency has the right to recover the cost of your care from your estate, up to and including placing a lien on your home. It’s worthwhile to have a plan to avoid Medicaid seizure of your house, like sheltering the property or having an alternative treatment solution prepared.
Depending on your answers to these questions, there are many ways to handle your home in your estate plan. An experienced attorney can help you understand your options and choose the right solution for your family.
Your Options for Passing Down Your Home
The simplest way to address your house in a will is to state you want it sold and the proceeds added to your estate. This is often the best option if your heirs do not have the means or desire to live in it. However, if you want to transfer ownership without selling it, there are four common solutions:
- Will Beneficiaries: This is relatively simple. You name one or more beneficiaries in your will who will inherit your home. They receive the deed to the property outright. However, they may also become responsible for the mortgage balance. Additionally, the property’s value counts against the federal gift and estate tax, which may place an additional financial burden on your heirs if you have a high net worth.
- Trusts: Revocable qualified personal residence trusts allow you to transfer property ownership without going through probate, usually with a lower tax burden. However, they must be carefully written to avoid unexpected legal and financial consequences.
- Transfer on Death Deeds: These deeds allow you to name a specific beneficiary for a property to transfer ownership outside of probate while maintaining step-up tax protections. However, limitations on the potential beneficiaries of transfer on death deeds may make them less useful for parents of minors or disabled adults.
- Co-Ownership: Adding someone to the property deed while you’re alive allows you to be co-owners. The other owner will receive full ownership of the property automatically when you pass, no probate necessary. However, there may be estate and property tax penalties associated with this solution that could be avoided with other options.
You can talk to the skilled estate planning lawyers at CC LawGroup to discuss your options. We will walk you through the benefits and drawbacks of each method and help you develop an estate plan that fits your family’s needs. Schedule your consultation today to learn more about how we can help you.
