July 8, 2021
Many people become emotionally attached to their homes, and for good reason. A home — whether it’s a primary residence or vacation property — is often the gathering place for happy and meaningful family events. It can be a nostalgic place where the family has spent a lot of time during their formative years and that still provides them with feelings of love and belonging. Sometimes it was built by a family member or has some historical significance. Other times, it’s in an ideal location that is fun, relaxing and inviting to return to again and again.
When the attachment is strong, some families make a goal of keeping the home for future generations to enjoy. Tiffany Shlain, an Emmy-nominated filmmaker, author and founder of the Webby Awards, and her siblings are glad that they did. As a guest on our Money Tales podcast, Tiffany discusses how she and her siblings continue to own her late father’s northern California home, which took years to build and furnish. That home continues to serve as a living reminder of the past while creating new memories, such as when Tiffany hosted a friend’s wedding there.
Keeping personal real estate in the family is something that often comes up in our work with clients. Many different estate and asset transfer techniques can help families make this happen. But beyond specific legal and financial steps, there are a number of practical considerations to keep in mind when planning to transfer ownership of a home to family members. Below, we discuss some of the key questions that can help guide conversations with your family before deciding to embark on this process.
First, the family needs to have some very frank discussions about who is the driving force behind the effort to keep the house in the family. If it’s the parents, then they should consider putting additional safeguards and financial resources in place to make sure the transfer plan is well thought out and puts the least amount of burden on the younger generations.
If, on the other hand, the kids are the ones pushing to keep the house in the family, they may need to be prepared to buy it from their parents. This is especially true if the parents are counting on the proceeds of the home sale as part of their retirement nest egg. In some cases, there are multiple kids with different levels of interest in the home and different abilities to help financially maintain it after the parents are gone. In these types of circumstances, things can get tricky quickly. So that’s why it’s crucial to make sure you and your family keep the dialogue open through all stages of the process.
Dealing with inheritances and lifetime gifts can often include some frank conversations and tough decisions, especially when people have strong emotional connections to the asset being transferred. And the tax consequences of selling or gifting a home to a younger generation can be significant, particularly if the home has appreciated significantly in value.
Having clear and direct conversations about the home and the surrounding financial circumstances is key to accomplishing everyone’s objectives in a fair and tax-efficient way. Having a financial planner, estate planning attorney or other trusted advisor in the room to moderate the discussion and think through the various strategies can be very helpful. There are also specific considerations for vacation properties, as we discuss more in Estate Planning for Vacation Homes.
A house can be a wonderful gift to receive — and an expensive one to keep. It’s crucial to understand how much money will be required to maintain it. In addition to insurance, property taxes and utilities, don’t forget about the cost of ongoing repairs, periodic improvements and all the other hidden expenses of home ownership. It’s incredibly important to develop a realistic annual budget and pad it with plenty of cushion, especially if you plan on keeping the home in the family for a long time.
If the cost to maintain the home is high, you’ll need a plan to cover those costs over time. Some parents gift additional funds that are dedicated to covering these costs so that the house isn’t a burden on younger generations. Also, if there’s a mortgage on the home, the family will need to think about how that debt will be paid off and who will be responsible for it, as well as who will receive the tax write-off. Keep in mind that mortgage loans can’t be transferred with the home from one generation to the next.
There are also non-monetary costs involved. Maintaining a house requires a commitment of time and energy, as well as dollars. Dividing up the work required to keep up the house is especially tricky if one or more of the children do not live near it. Hiring a professional property manager may be necessary in some cases and may help avoid conflicts when the burden of maintaining the house is not shared evenly.
When discussing these central questions with your family, there are a host of other details that you’ll likely want to think through — many of which don’t directly deal with money. Some of these more specific questions include:
These are some complex topics, so don’t feel that you need to resolve everything in one sitting. This is an important decision and may require a number of discussions over time to sort out all the issues. That’s OK, and it’s a sign that open communication is working.
As readers of this blog know, we strongly believe that open discussions are the foundation of financial fulfillment. We hope that these questions can help guide your family in having productive conversations about passing a home to a new generation.
If it sounds like there’s a lot of ground to cover in these conversations, that’s because there is. But if keeping a treasured home in your family is important to you, don’t be deterred. With proper planning, clear family communication and guidance from an experienced financial advisor, you can craft a solution that allows the home you love to continue being the setting for many happy memories for years to come.
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