Should I put my house in a trust for children to inherit?


Q. Is it better to leave your house to your children or putting the house in trust for them?
— Planning

A. Whether or not to put a house in a trust is a common estate planning question.

There are various ways to leave your home to your kids.

The most problematic is to transfer the deed to your child or children, said Nancy Heslin Reading, an estate planning attorney with Reading Law Firm in Newton.

“If the child/children get a divorce, file for bankruptcy or are sued, your home is now an available asset,” she said. “Also, if a child predeceases you, your home is now in their estate and under the control of their executor.”

Also, she said, if there are significant capital gains that have accrued since the home was purchased, the child or children will also inherit the capital gains liability, which can be substantial.

Reading said some real estate attorneys will transfer the home to the children and retain a life estate for the owner.

“This kind of transfer has the potential to allow the capital gains that have accrued on the property to be wiped out at the death of the life estate holder,” she said. “However, if the life estate holder decides that he or she wants to sell their home, the children will have to sign the listing agreement and consent to the sale price because their names are now on the deed.”

Also, she said, the children’s remainder interest has a substantial dollar value and they will get that money at the closing. The life estate holder will not get all the sale proceeds., she said

And, if the life estate holder needs Medicaid within five years, Medicaid will consider the new life estate deed to be an uncompensated transfer subject to a Medicaid penalty period, she said.

That would also be true if the home was placed in a trust.

This means the trust now owns the home, not the person who originally purchased it.

Capital gains is a big concern, she said.

“A skilled trust attorney can help navigate these waters to avoid undesirable outcomes,” she said. “However again, if Medicaid is needed within five years there will be a hefty penalty because the transfer to the trust can be deemed an uncompensated transfer.”

Reading said a trust requires a trustee who is the only person who can sell the house when the time comes. The owner no longer can, so whether there is a good candidate to serve as trustee is a big consideration, she said.

“However, if the home is an out of state vacation property, it can make a lot of sense to put the property into a trust that will avoid the need to file for ancillary probate in the state where the property can be found,” she said. “A trust attorney would be needed to help ascertain whether under a given set of facts, this is a good idea.”

Reading said a house can also be left to children in a Will, but it can be fraught with complications:

“If the house is left to all the children, they will have to split the taxes, mortgage and carrying costs. Inevitably some children can afford that and others can’t, creating an unworkable situation,” she said. “It is also inevitable that at least one will want to sell because they need the money, and other children will not want to do that causing friction.”

If one of the children lives in the house and the others don’t, that is complicated, too. The children who don’t live there will want their share of the pie sooner rather than later, she said, noting that the only workable option is for the child in residence to buy the others out if he or she can.

The ideal solution is to let the house pass under the will as part of the estate, Reading said.

“The executor will have the option to sell and distribute the proceeds without requiring the consent of all the siblings,” she said. “This can vastly simplify the transfer of the house. And the other children will always have the option of buying the house from the estate if they want it.”

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This story was originally published on Aug. 22, 2023. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.

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