For me, and for my clients, our homes are our most valuable assets. Buying a home, making it your own, and paying down a mortgage are all significant life events. Homes play major roles in our later lives too; they are a core source of wealth and a financial safety net.
Because of how large of a part homes play in our everyday lives, they also come into play when it comes to legacies and estate planning. When I work with clients, helping them transition their financial lives from one of living hand to mouth to one of wealth building, one thing I focus on is how to pass on their largest, most valuable asset to their heirs. To accomplish this, I talk about four common ways to include a home in your estate plans, using a revocable trust.
What is a revocable trust? A revocable trust is a legally binding document that can be changed at any time you wish, for as long as you are alive. After you are deceased, the provisions become irrevocable and your wishes carried out. Why is having this trust so important? Because trusts usually exempt conveyed assets from being tied up in probate -- a time consuming, expensive process.
How much does a revocable trust cost? Generally, revocable trust planning can be done for as little as $500 or as much as $3,000, depending on how specific you need the trust to be. When I did mine, I was able to umbrella everything I wanted into the trust with a real estate and probate attorney for $750 -- a reasonable fee in my book. Yet, before I signed on the dotted line -- and before I give my clients the nod of approval to do the same -- I did a little homework about the specifics of revocable trusts and found four things that every homeowner needs to know.
Legacy provisions. This type of revocable trust allows a homeowner to define how the home is to be preserved well into the future. It gives you the freedom to transfer the house to one or more family members with specific instructions. For example, you could specify that the home is never to be sold, that it must stay within the family, or how different siblings are expected to care for and upkeep the property.
Specific bequests. The trust conveys the property to specific owners and does not come with added provisions. In these cases, if you are worried about causing family arguments over the disposition of the property when giving it to multiple children, you can specify in the trust that you want the home sold and then provide the proceeds to the heirs. Regardless, this type of trust allows you to be specific about the disposition of your home after you are deceased, without adding in provisions or upkeep or other rules for the heirs.
Charitable intentions. In this trust, the beneficiary is a charity. The trust can convey the home directly to the charity or instruct a trustee to sell it and donate the proceeds to the charity specified.
Options provisions. If you want to keep your home in the family, this type of trust gives a named heir the option to purchase the home and, if he or she declines, the option to buy is then conveyed to a second named heir and so on. If no heirs are interested, the trust can dictate that the home needs to be sold to and proceeds divided amongst heirs or given to charity. The caveat here is that the IRS requires all of these transactions be done at fair market value, meaning that an heir can't offer to purchase a home for $1 under the trust. This type of trust is ideal for individuals with a balance on their mortgage that needs to be paid off, assuming they passed away without adequate funds in the bank to pay it off.
Of course, there is no substitute for professional advice. Talk to a real estate or probate attorney for specific scenarios relevant to your financial situation.
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- Real Estate