Estate Planning

Buying a house and your estate plan in Minnesota

By admin

It’s been a while since I’ve posted to my Minnesota Estate Planning Blog, and that’s because my wife and I have been on the hunt for a house.  During our search I began to think of how buying your first home can greatly impact your estate planning needs.  This is the topic we will tackle today, how buying a home changes what you need to plan for.

A home is often times the largest investment a person will make during his or her lifetime.  With such a large investment comes the responsibility to ensure that you plan for the future of that investment.  When you buy a home you also purchase insurance, fire, theft, liability and so on.  An estate plan is another form of insurance.  You decide to whom your home passes, how it passes and potentially save taxes on the transfer.

Speaking of taxes, in Minnesota your estate will be taxed if it exceeds $1 Million.  The federal tax threshold, as of 2008, stands at $2 Million.  These taxes are independant, if your estate exceeds $2 Million you will incur both Minnesota and federal taxes.   Purchasing a home will greatly increase the value of your estate and will bring you much closer to those tax thresholds.  With an estate plan you and your attorney can work together to ensure that your home is titled in the appropriate way.  Titling your home as joint tenants with rights of survivorship, tenants in common or in a certain trusts will remove your home from your taxable estate which can save quite a bit of money.

An additional tax related consideration when transferring a home is the set up in basis.  The procedure and rules of the step up in basis has been covered in several of my previous posts, but we’ll go over the basics.  Generally when someone inherits valuable property they will receive a basis step up to the fair market value of that asset.  Your basis is used to calculate gain or loss when the property is sold.  Subtract the basis from the sale price to determine taxable gain or loss on property.  For example, if Mom bought an asset for $100,000 and sold it for $300,000, she would have a taxable gain of $200,000.  If Son inhereted that asset from Mom, and at that time it was worth $300,000, son would have get a step up in basis to the fair market value of $300,000.  Son could turn around and sell that asset the next day for $300,000 and would have no taxable gain on the property. 

The step up in basis can be even more beneficial when the asset is a home.  The tax code provides that if it has been lived in as a home for at least 2 years you will not be taxed on the first $250,000 of gain realized on the sale of that home.  Therefore if son inhereted a home from mom he would receive a step up in basis to the fair market value and could sell the home for up to $250,000 more than his basis and realize no taxable gain on the property.

Among the non-tax estate plannig considerations when purchasing a home is planning for the passing of the home after your lifetime.  If you are married chances are that you own the home as joing tenants with rights of survivorship with your spouse.  But when both you and your spouse pass away where should the home go?  If you have multiple children and had not estate plan the home would be just another asset to be split up amongst them.  There are only a couple of options for the children in this situation. 

All of the children can share common ownership of the property.  But this would require all of the children, and their spouses, to agree on everything that is done with the home.  This can create unwanted family conflit.  Another possibility is that one or more will have to buy out the other children’s interest in the home, a spendy endeavour, but the prevoius problem is likely in this situation as well.  Or the home will need to be sold, usually in a short time span, and the proceeds split up amongst the children.  This option often times results in a lower than market value sale of the home, hurting everyone in the process.

These options can be avoided by making the decision yourself, while you are still alive, regarding the future ownership of the home.  You get to decide which person(s) should own the home or whether it should be sold or held in trust for your children.  Planning for the future transfer of your home helps reduce family conflict, stress and can save everyone time and money.

Buying a home is an exciting process, but the increased value of your estate will impact your planning needs.  Taking control of your future through estate planning is a great way to make sure that your wishes are followed and you and your family can rest easy knowing you have a strong plan in place.

If you have questions about home ownership and its effect on your estate plan, or lack thereof, please feel free to contact me.  I can be reached via email at james@jtandersonlaw.com or via phone at (952) 356-6470.  I am happy to make housecalls and all initial consultations are free of charge.

Full post as published by Minnesota Estate Planning Blog on July 09, 2008 (boomark / email).