4 Reasons Why You Need an Estate Plan for Your Home
1. A good estate plan keeps your heirs from fighting. Say you intend to leave your house jointly to your children. But what if one child wants to live in the house and the other wants to sell it? A reasonable estate plan wouldn't force one child to indefinitely forgo a share in the value of the house. Solutions: If you have other assets, divide your estate, leaving the house to the child who wants it, and property of equivalent value to the other. If the house makes up the bulk of the estate, an insurance professional can help you with a policy that provides enough money for one sibling to buy out the other's share. Talk with your heirs up front so you structure your estate plan to head off potential problems.
2. A good estate plan means no financial surprises for your heirs. Two scenarios: You sold the family home and bought a retirement condo, with a mortgage. Your heirs will eventually inherit both the condo and the loan as part of the estate. But they can't assume the mortgage unless they're planning to live in the condo. They'll have to pay it off. That can be a shocking and costly surprise. It is also possible that in later years you'll want a reverse mortgage to help pay for nursing care while you stay in your home. Upon inheriting the house, your heirs will have to come up with the money for the outstanding loan. Otherwise they'll likely have to sell the house to pay back the lender. The bank won't allow your heirs to just assume a reverse mortgage. Further if you move out of your home for any reason the reverse mortgage can be called for full payment or the home can go into foreclosure. Action plan:Explain your situation to your heirs in advance as part of your estate plan, so they can be financially and emotionally prepared. 3. A good estate plan means less of an estate tax hit. With estate planning, your biggest issue is taxation. But you're pretty safe because although the federal estate tax has returned for 2011 and 2012 (after a 2010 hiatus), it's toothless for most of us: You won't get hit unless your estate is $5 million or more. But you'll pay 35% on inheritances above that. You'll face little to no capital gains tax. For example: your parents bought their house 20 years ago for $20,000; now it's valued at $250,000. Shortly after you inherit it, you sell it for $250,000. Under 2011's full step-up rules, you pay no taxes on the profit. (Without any step-up, you would have to pay a hefty tax on the capital gains of $230,000.) Of course, if the home starts to rise in value after you inherit it, you'll pay capital gains on the difference between its value on the day you inherited it and the price you sell it for. In 2010, there was a limited step-up: Everything you inherited—house, investments, other values—could be stepped up to a total of $1.3 million. So a home sale in 2010 may have given you a capital gains hit, depending on the amount of appreciation of not only the house but other inherited valuables.
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