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Using Estate Planning to Pass on Your House to Your Children

Having a home is nothing less than a blessing, but when it's time to downsize or do estate planning, individuals often rush into gifting their assets to their children. Gifting might seem like a generous step, but the reality might be the opposite. Sometimes, lavish gifts, including a home, can be a white elephant. One should be careful about whether to gift a home in their life or after death because poor timing makes this blessing a burden.


 

Gifting Your Kids a Home in Your Life vs. After Death

While planning your estate, keep in mind a few things, such as the ideal time to pass your home to the next generation. Gifting your home to your children in your life and after death are two different situations.

When individuals gift their homes to their children while still alive, it may not necessarily benefit the children, as they may incur additional taxes and other expenses. Conversely, leaving the home to your children through your will can significantly reduce the tax burden.

If a person gifts a piece of property to their children, and the children intend to sell it in the future, they may face substantial tax liabilities. In contrast, inheriting the property typically results in lower taxes. Therefore, the tax implications vary significantly depending on the chosen option.

 

How is a House a White Elephant Gift?

What do we mean by a White Elephant? No, it’s not just a light-hearted gift exchange game played at company parties. The expression comes from white elephants being a mark of prestige and wealth in parts of Southeast Asia.

Since these animals were considered sacred and exempt from labor, receiving the gift of a white elephant from a monarch was simultaneously a blessing and a curse. The recipient now had an expensive-to-maintain animal they could not give away and could not put to practical use. Sound familiar?

 

Your Child Might End up Paying Huge Taxes

Giving your children homeownership during your life makes them responsible for the home taxes that you previously paid. This additional tax might be unmanageable for them.

Before going ahead with such a huge decision and surprising your child, ask them about their financials. See if they can manage the added responsibility. Don't transfer your property to your child's name during your life if it burdens them with taxes.

 

Children Need to Clear Your Mortgage

Another reason a home can become a white elephant is because kids end up paying their parent's share of the mortgage. It's great if you have no dues on your home. However, don't transfer the property to your kid's name if you are still repaying your debt.

Like your home's ownership, the mortgage is also transferable, which means your kids incur a financial burden they might not be prepared for.

Compounding the issue, they might end up repaying the debt at a higher interest rate if their current credit scores are below par.

 

Understanding the Step-up in Basis for Your Heirs

A common misconception is how much your children will benefit from getting property in your lifetime. As per the Step-up in Basis rule, your home's cost is raised when you pass away, which means lower future capital gain taxes. In simpler words, your kids are exempt from higher gain taxes when your property is passed onto them after your death rather than in your life.

 

Benefits of Continued Rental Income

One should also remember that retirement comes with its fair share of expenses and individuals often miscalculate about their future spending. Instead of limiting your income, think of opting to rent your property. That allows you to have a predictable monthly income and you won’t have to look towards anyone for monthly expenses.

This is the best way to increase your profits without affecting your retirement plans. Later on, your kids could continue with the same housing arrangements.


Conclusion

Gifting your home to your child in your life is a huge financial decision and shouldn’t be taken lightly. While your intentions might be clear, it is better to consult a financial advisor about inheritance planning to understand whether you should gift them your property now or leave it in your will. After all, you wouldn’t want to see them suffer while you’re alive.

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