Best way to pass down property

When it comes to estate planning, a family home can be among the most valuable—and complicated—assets to pass down.

"It's perfectly natural to want to see a cherished home stay within the family," says George Pennock, director of trust services consulting at Charles Schwab Trust Company. "But you need to think about not only your own needs and wishes but also those of your heirs."

For example, your child may love the family home and all the memories that go with it, but does he or she actually want to live there? If you have multiple heirs, is it realistic for them to co-own the property, or will such an arrangement create conflict?

You also need to consider the role the house will play in your later years. "Do you plan to stay in the home, or is it possible you may need or want to move at some point?" George asks. "All of this factors into how—and whether—you transfer the property to your kids."

With that in mind, here are three ways to pass along a home to your heirs—both during and after your lifetime.

1. Sell it

If you're looking to move or put your home's equity to use elsewhere, selling the home to a child or other heir could be a good option. Doing so removes the property from your taxable estate and establishes a new cost basis—meaning the capital gains on any future sale will be calculated using the value of the home on the date of the transfer rather than your original purchase price. Although you might be tempted to sell the home at a low price, be careful not to go below its fair market value. Otherwise, the difference between the sale price and the market value could be subject to gift taxes.

2. Gift it

As generous as it is to gift a home to an heir during your lifetime, it could have negative tax repercussions. That's because such a gift counts toward your lifetime gift tax exemption. That might not seem like an issue now that the combined gift and estate tax exemption is $12.06 million for individuals ($24.12 million for married couples) in 2022, but that number is set to come down by half starting in 2026, if not sooner. If that happens, such a gift could result in a federal estate tax of up to 40%, depending on the size of your estate. State-level gift, estate, and inheritance taxes could also be a factor, depending on where you live.

The tax consequences could be even more severe for your heirs, especially if you give your home to your child during your lifetime—such as through a deed transfer. If your child decides to sell the home, the cost basis will be calculated using your original purchase price, potentially increasing the capital gains.

Generally speaking, there are three methods for leaving a home to your heirs:

• Last will and testament: You can use your will to designate to whom the home should go and in what proportions. That said, wills are required to go through probate—the sometimes lengthy and often costly legal process of validating your will—which can slow down the transfer of ownership to your heirs.
• Transfer-on-death deed: If probate is a concern, you may be able to sign a transfer-on-death deed—available in 29 states and the District of Columbia—which allows you to pass the property to your heirs outside probate upon your death.
• Trust: Another way to avoid probate is to transfer the property into a living trust, which has the benefit of allowing you greater control over how the property is managed and under what conditions it can be sold. The home would remain part of your estate until your death, at which time it would pass to your heirs outside probate.

However generous your intent, George warns that the bequest of a home can be an albatross if not accompanied by additional funds to help cover improvements, insurance, maintenance, and taxes—particularly if you plan to leave it to multiple heirs. "You don't want to make your kids house rich and cash poor," George says. "Nor do you want them fighting about the costs of ongoing maintenance and upkeep." In such cases, setting aside funds in a trust dedicated for this purpose can help ensure the home is well maintained for years to come.

Regardless of the method you use to pass down the home, it will receive a new cost basis upon your death, meaning any capital gains taxes resulting from a future sale would be calculated using the fair market value at the time of the transfer.

Talk it out

Whether you sell, gift, or pass down your property, the transfer could trigger a reassessment of the home's property taxes, so be sure to factor that into your plan—ideally with the help of an attorney or a tax advisor.

In addition to consulting financial professionals who can help you put your plan in place, you'll want input from anyone affected by your decision. "The most important thing you can do is to make sure all family members are part of the conversation," George says. "That way, everyone has the chance to see their needs and wishes reflected in the plan for your home, which can avoid unnecessary conflict down the road."

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Charles Schwab & Co., Inc. ("Schwab") is affiliated with Charles Schwab Trust Company (CSTC), the corporate trustee for Schwab Personal Trust Services (SPTS).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.