Does buying a house affect my estate plan?

Originally published by Carey Thompson.

The simple answer is a definite “yes.” For many people, a house is their most valuable asset, so adding one to your estate will affect many aspects of how your estate plan should be structured.

As with any major alteration to your property holdings, or to any life-altering events—such as a birth, marriage, death, or divorce—the purchase of a house is something to discuss with an estate planning attorney. If you don’t already have one at the time you buy the house, this is definitely a good time to consult with someone well respected in the field.

Depending on the price and location of your new house, you will have many questions to ask your estate planning attorney. Moreover, an attorney with extensive knowledge of protection of assets, wills and trusts, tax avoidance, and probate will probably bring up subjects you didn’t even think to ask about. This is why when you purchase a house, it is strongly advisable to have an experienced estate planning attorney.

Estate Planning Questions to Be Considered When Buying a House

Why are people so concerned about probate? How will my purchase of a house affect it?
Probate is the court-supervised administration of estates. The greater and more complex your assets, the more likely probate is to be expensive and time-consuming, which is why so many people try to avoid it. An estate planning attorney will understand the laws of your state, as well as federal tax laws, and be able to provide you with appropriate guidance on this matter.

Will it help to put my house into a revocable trust?
A revocable trust, also known as a living trust, is useful if you purchase a home in another state, for example as a vacation home. It is important to realize that you can place mortgaged property into a revocable trust as well as property you own outright. Doing so will assist you in avoiding probate and will lift a burden from your executor. Without the revocable trust, your executor will most likely have to deal with attorneys in both states and pay additional probate fees.

Is it wise to own my new house jointly with one of my children?
Joint tenancy may seem like a simple way to transfer your newly purchased house to your oldest child as beneficiary at the time of your death, as well as a nifty way to avoid probate and possibly decrease tax liability. In spite of the fact that joint ownership may allow you to qualify for Medicaid if you develop long-term incapacity, there are several possible drawbacks, including:

• Exposing your house to liability for your child’s actions. If your child has or develops an addiction to drugs or alcohol, gambling, or compulsive buying, or if that child is the defendant in a lawsuit and loses the case, one of your major assets may be jeopardized.
• Putting your wishes about distribution of your assets at risk. Because joint tenancy exists outside of the terms of a will or trust, even though you intend to distribute your estate to your children in equal shares, the child who shares ownership of the house may receive more than his or her share.
• Adding one child’s name to the property may wreak havoc as far as gift and estate taxes are concerned. Unless the designated child has contributed an equal amount of money to the purchase of the house as the parent, the entire value of the home will be included in the parent’s estate for estate tax purposes. In addition, in this situation, the parent could be liable for a gift tax at the time of purchase or transfer.
• By already having joint ownership of the property, your child will lose the step-up basis that would have allowed him or her to have your house valued at the time of your death rather than at the time of purchase, greatly minimizing the gift tax burden.

Will a Qualified Personal Residence Trust, or QPRT, Help me Reduce the Gift Tax?
Your capable estate planning attorney will be able to establish a QPRT if he or she believes it’s in your best interests. A QPRT is a specific type of irrevocable trust that allows its creator to remove a personal home from his or her estate by putting it into a trust. Doing so will reduce the amount of gift tax owed by the beneficiary at the time of the testator’s passing.

The downside of a QPRT is that the trust is irrevocable and you lose control over this important asset. In the event that circumstances change, you may regret having taken this action. Your estate planning attorney will assist you in deciding whether a QPRT will be beneficial in your particular case.

Make Sure Your Estate Plan Takes Your New House Into Account
Estate planning is a serious task that will affect your future and the future of those you love. Make certain that your estate planning attorney is kept apprised of any major lifestyle changes. As you can see, buying a house, with all of its financial complexities, qualifies.

Carey Thompson has been practicing Social Security disability law since 2008 after graduating from Texas Wesleyan University School of Law, now Texas A&M University School of Law, in Fort Worth. While at Texas Wesleyan, he served on Law Review. Prior to law school, Thompson was a high school band director for four years using his degree in music education from Michigan State University. He can be contacted at thompsonlawtx.com.

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