A home is the largest asset for American households, surpassing retirement accounts, vehicles, and other assets.(1) For 30 percent of households, their home is their only source of wealth.(2)
Unfortunately, many people don’t have a plan to protect their homes after they pass away. This can leave their home open to probate expenses, creditors, and other issues that may burn down the value of their home. To protect your home and most effectively pass it on to your heirs, consider the following issues and options.
Many people mistakenly think that having a will can protect their home. It helps control who benefits from the house and in what manner. However, even if a person has a will in place, his or her home must still go through probate after they pass away.
For a couple, that process would take place after the second spouse passes away. As the home goes through probate, there can be significant expenses, and the value of the house will be on the public records.
In an attempt to avoid probate, some people will mistakenly add on a child as a third joint tenant. However, this can have devastating tax implications, as the child will be deemed to have been “gifted” the home and inherit the existing cost basis.
For example, if the parent(s) bought the home for $50,000 and it is worth $250,000 at the time of the parents’ passing, the child will have to pay tax (when selling the home) on the gain of $200,000. That would be roughly $40,000 in taxes at a 20 percent long-term capital gains rate. The couple would have been better off to leave the home in their name; then it would at least get a step-up in basis, where the heirs would only pay taxes on any gains above the $250,000 upon selling.
There are two better options to address these issues and still get a step-up in basis.
Transfer On Death Deed (TODD)
The first option is to create a TODD and file it with the county recorder.(3) The TODD has only been an option since May 8, 2018, when Utah enacted the “Utah Uniform Real Property Transfer of Death Act.” Previously, Utahans didn’t have a cost-effective method to transfer a home to their heirs.
Now an individual or couple can list beneficiaries that will inherit the home, thus avoiding probate and keeping the value private. It will allow the inheritors to get a step-up in basis, and to file a deed with the county recorder’s office only costs $40.
However, a TODD has some potential issues:
(1) A home inherited through a TODD cannot be sold for one year unless the personal representative files probate, which negates the original purpose – avoiding probate.
(2) The TODD may violate transfers to minors’ laws, and creditors of the beneficiary can take away the inherited property. Both Salt Lake and Utah County recorders’ offices recommended speaking with an attorney before creating a TODD (reducing the cost-effectiveness).
A trust may bring you the most control while keeping the value private. Like the TODD, a trust allows the property to get a step-up in tax basis. Plus, the trust can hold a property for a minor, protect it from creditors, and provide flexibility to sell immediately. It should be created through an estate-planning attorney, and the home must be re-titled in the name of the trust. This is more expensive than a TODD, but usually costs less than probate. It may also save a lot of headache and heartache.
SFS and its employees do not provide legal services; therefore it is important to coordinate with your attorney regarding your specific situation.
Sources: (1) https://www.nahbclassic.org/fileUpload_details.aspx?contentTypeID=3&contentID=215073&subContentID=533787&channelID=311