Your home is among the most important investments you’ve ever made. It’s likely also the location of many wonderful memories and sentimental attachments. This combination of strong emotions and significant financial value can make family homes subject to substantial probate court disputes. That’s why it’s critical to give your home the attention it deserves during the estate planning process.
However, California laws make passing on homes more complicated than you might expect. Here’s what you need to know about California’s requirements for transferring real property and strategies for effectively passing on the family home.
California Real Estate Transfer and Inheritance Laws
California does not have any general inheritance or estate taxes. However, the federal government does. Federal estate and lifetime gift taxes apply to any person who gives away or passes on property valued at more than $12.06 million, including the worth of any real estate. In California’s real estate market, even a modest house can take up a significant amount of that cap. Any value above that amount that is not sheltered is subject to a 40% tax rate.
That can have a significant impact on the overall value of your estate. Since home values continue to rise, it’s likely that homes will continue to take up a significant percentage of the estate tax cap, making it harder to pass on the property without facing dramatic tax burdens. However, forward planning makes it possible to transfer family homes without burdening your heirs.
Strategies for Passing On Homes
There are multiple methods available for passing real estate to your heirs before or after your death. The proper technique depends on your personal preferences. The following four strategies are some of the most commonly used, and each can succeed in different circumstances.
Simply passing on the property in your will may be sufficient if you have a relatively simple estate. Suppose you’re confident that your entire estate will not exceed the federal tax limit. In that case, you can assign your home to a specific beneficiary in your will, and they will not face a tax burden beyond standard property taxes. However, if you have significant assets, multiple heirs, or privacy concerns, you may prefer a different solution.
In some cases, selling your home may be the best solution. For example, if you anticipate moving to a residential care facility and one of your heirs wants to keep the house, you may choose to sell to simplify the rest of your estate. The sale proceeds become part of your estate to be divided with other liquid funds. Of course, this solution only works if you no longer need to live in the home.
If you assign co-ownership of the property to your heir, you can pass on the deed without the property ever going through probate court. It immediately becomes their property in full when you pass on. Should you be incapacitated, it also gives them the right to make decisions about the property.
However, half of the home’s value becomes a taxable gift when you pass. As a result, half of the home’s worth will still apply to the $12.06 million lifetime limit. In addition, while you’re still alive, any financial problems your heir has could lead to a lien being placed on the home while you still live in it.
Trusts are independent legal entities. Assets placed in a trust are not technically your property anymore. Instead, they belong to the trust and must be managed by the trustee on behalf of the beneficiaries. You can use revokable trusts to pass on your home by placing the property within the trust and naming your heirs as the beneficiaries. This circumvents the need for probate court but requires significant care to ensure the trust will stand up to legal scrutiny.
Plan to Pass On Your Home With Expert Legal Assistance
There’s no single right way to handle a house in your will. The most effective solution depends on your personal circumstances. That’s why working with an experienced estate planning attorney is so important. Schedule your consultation with The Dayton Law Firm, P.C., to learn how we can assist you with the planning process and ensure your home is handled appropriately.