The Ultimate Estate Planning Guide: Leaving Your Home to Your Children

Image of a family playing with a kite outside their house.

Any parent will admit that raising kids is no easy task: From helping your children with their school work to planning dinner each day of the week, your schedule is packed! With all the hustle and bustle taking up your time, it’s likely that the last thing on your mind is estate planning for your children’s future.

If this sounds like you, then you aren’t alone: According to a survey conducted by Caring.com, 78% of millennials (ages 18 to 36) and 64% of Generation X (ages 37 to 52) do not have a will.

The fact is, the younger you are, the less you think about end-of-life issues like estate planning. But that doesn’t mean it’s unimportant. If you don’t have an estate plan, you have far less control of how your wealth and property are divided.

This is especially true if you have (or plan to have) children. Once you do have kids of your own, providing for their future will become your top priority.

One of the best ways to do that is to plan how, when, and to whom your estate should be divided. The sooner you start estate planning, the better; as you grow older and circumstances change, you can adjust your will accordingly.

So what exactly is estate planning and how does it work? We cover everything you need to know below.

Table of Contents:

What Is Estate Planning?

Illustration of father and mother thinking of their home and how to start estate planning

Estate planning is how you pass on your personal property to those you love according to your wishes. Specifically, estate planning answers three questions regarding your estate:

  1. Who do you want to receive your belongings?
  2. What or how much do you want them to receive?
  3. When do you want them to receive it?

By answering these questions, you can avoid arguments between family members, unnecessary court costs, legal fees, and even certain taxes.

Who Needs Estate Planning?

Everyone needs estate planning. The term “estate” can be confusing, though. Many people assume that only the wealthy have an estate, but that couldn’t be further from the truth.

Your estate includes everything you own, from your car, home, and debts to the clothes on your back. It even includes those who depend on you, like your spouse, children, or even pets.

If you don’t take charge of your own estate planning, then you leave it up to your state’s court system to do it for you. By putting matters into the court’s hands, you risk costing your family a lot of time and money. You also give the court control of your child’s future if you do not know someone willing to act as their legal guardian.

When you really consider everything you’ll leave behind, estate planning begins to make much more sense, even if you think your material possessions aren’t that valuable.

Will I Be Affected by State or Federal Estate Tax?

Currently, only 12 states charge an estate tax and exemption levels are up in the millions. You are only expected to pay estate tax if your estate’s total value exceeds your state’s exemption level. Although it’s true that not all states have an estate tax or even an inheritance tax, there is such a thing as a federal estate tax.

The federal gift tax exemption for 2019 is $11.4 million, meaning that only the portion of your estate that exceeds the exemption will be taxed. For example, if your estate is worth $11.6 million, you would exceed the exemption by $200,000 and would only be taxed for that amount. You should only worry about state or federal estate taxes if you really do have a large estate.

Important Documents for Estate Planning

Illustration of mother and father talking to an estate planning expert holding documents

To make sure you’ve addressed all of the most pressing items in your estate plan, here is a brief checklist of what you should (or may) include:

  • Include a living will or a set of instructions detailing how you would like to be cared for if you’re incapacitated or disabled before you die.
  • Name a guardian and an inheritance manager you trust to oversee your children if they are minors.
  • Pass on belongings to special needs family members without disqualifying them from government benefits.
  • Purchase a life insurance policy so that your children are provided for after you die.
  • Ensure your business assets are transferred to the right people — such as a business partner — after you retire, pass away, or are disabled.

Estate planning is a big part of end-of-life planning, which is why end-of-life documents, like a power of attorney and advanced healthcare directives, should be included. The more details you provide, the better off you and your loved ones will be down the road.

We’ve covered what to include in an estate plan, but there are different approaches that could save you and your family time and money. First, we will cover what exactly to include in a living will and then dive into other end-of-life documents and how they affect your estate.

Last Will and Testament

Illustration of a last will and testament document

A will, or last will and testament, is where you state your final wishes regarding your property. Once you die, your will dies with you, and every asset titled to your name in that will — from personal valuables to your home — must go through probate court.

Probate court is a special type of state court that deals with the administration of estates. Because probate exists on the state level, the rules and regulations vary between jurisdictions. As your estate goes through the probate process, court costs, legal fees, and various taxes are all taken directly from your estate before it’s distributed to your beneficiaries. In total, the process can take anywhere from nine months to two years (or longer).

To minimize the costs and the amount of time probate takes, it’s important to cover as much as possible in your last will and testament. Here is a detailed list of what to include:

  1. Executor: A person or institution you appoint to ensure that your wishes are honored and carried out as written.
  2. Beneficiary: The person(s) you name to inherit your property after you pass away.
  3. Personal property: The specific properties listed in your will, and how and to whom they are to be distributed.
  4. Business assets: The specific business interests under your name are usually addressed separately from your personal assets.
  5. Debts, expenses, and taxes: Outstanding debts or other final costs, like funeral costs, and how they are to be handled should be addressed specifically.
  6. Special instructions: Any other details, like how your home should be cared for after you’re gone, should also be addressed.

If you have a complex estate, meaning you own several properties in different states, have a blended family, or have a substantial amount of wealth, then it’s wise to consult a legal expert while drafting your will. While it varies from state to state, most states require you to have at least two impartial witnesses present as you sign your will.

Documents for Minors

Illustration of a little girl holding a teddy bear

If you have children that are minors, then you’ll want to provide for them financially if you pass away. You might provide enough money to cover them until they turn 18 or even pay tuition costs and fees for college after they graduate high school.

While the extent of coverage you offer is up to you, it’s crucial to set your plans in motion far ahead of time to make sure they have what they need. Here are some considerations to ensure they are provided for:

Name a Guardian

Naming a guardian is the best way to provide a great future for your child. By naming someone you know and trust, you ensure your child can lead the best life possible without you. If you don’t take the time name a guardian, though, the state will have the task of appointing one for you.

So what all does a guardian do and what should you look for when choosing one? A guardian is anyone granted the legal responsibility of raising your children. For this reason, you need to pick someone you know and trust. Because this person will be responsible for providing for your children financially, it’s also important that they have access to funds if you pass away.

Here are some questions you and your spouse should discuss together when thinking through possible candidates:

  • Is this person responsible enough to raise my children and handle their finances?
  • Is this person a legal adult?
  • Do they love my children?
  • Should this person live close by or is it okay for my children to relocate?
  • Does this person have a stable home life?
  • Is it important for this person to embody my religious and/or moral beliefs?
  • Does this person have any medical conditions that would prevent them from providing sufficient care for my child?

The most important factor here is trust. Ideally, you want to pick a financially responsible person that you know well. Once you’ve selected a guardian and they accept, you need to appoint them by naming them in your will.

Buy Life Insurance

Purchasing life insurance is not a requirement, but it is definitely something to consider when you have children. Although there are many types of life insurance available, a popular option for young parents is term life insurance.

Term life insurance is more affordable than whole life insurance and it comes with many benefits. For one, life insurance doesn’t go through probate, so your dependents would receive a tax-free death benefit 30 to 60 days after a claim is filed.

Once your dependents receive the payout, it can be used to pay for end-of-life expenses, daily expenses, childcare, your mortgage, or even co-signed debt, among others. When naming your beneficiary, you can select your spouse, your appointed guardian, or even a sibling or relative.

If your children are under 18 (or 21 in some states), then they legally cannot receive your death benefit. In this scenario, the court would distribute the payout once they reach the age of majority.

Trusts

Illustration of revocable and irrevocable trusts leaping over probate court

Unlike your will, a trust doesn’t die with you. Depending on the type of trust you’ve taken out, assets included under the name of the trust may not be subject to probate. Trusts also have other benefits, which we will discuss below. While this is not at all an exhaustive list, here are three types of trusts that have specific benefits for your children.

1. Revocable vs. Irrevocable Trusts

It’s important to distinguish between revocable and irrevocable trusts. A revocable trust is a type of trust where you, the grantor, maintains control of assets put under the trust’s name. Revocable trusts are ideal if you do not have any major tax concerns. In the event that you become incapacitated, a designated trustee takes over ownership of the trust.

An irrevocable trust, on the other hand, cannot be modified or terminated by you, the owner. Once assets have been placed into the trust, you no longer have ownership of those assets; rather, the assets are managed by a predetermined trustee.

This affords your assets certain protections by placing them out of reach from creditors, lawsuits, capital gains taxes, and specific estate taxes, as well as nursing homes, which can access funds held under a revocable trust to pay for bills. Both types of trusts are exempt from probate.

2. Credit Shelter Trust

A credit shelter trust (CST) allows you to partially or completely avoid estate taxes when passing your assets on to your children. As a type of irrevocable trust, the real benefit of a CST is that a surviving spouse can tap into the funds held under the trust for specific purchases, such as paying for college tuition. Once the surviving spouse passes away, the assets are transferred to other beneficiaries without estate taxes being taken out.

3. Charitable Trusts

Charitable trusts are irrevocable trusts that you, the donor, create to support both a philanthropic cause and your beneficiaries after you die. By donating part of your estate to a cause as an outright gift, you can reduce how much of your estate is taxed, which will in turn reduce the amount of money is taken from your beneficiaries.

How to Pass On Your Home to Your Children

illustration of mother and father gifting their home as a small present to their son

If you would like to pass down your home to your children, there are several ways to keep in mind. How you pass on your property has legal and tax implications, so you should consult an expert before proceeding.

With that in mind, here are three ways to transfer your home to your children:

1. Sell Your Home

You can sell your home to your children and still live in it. To do so, you need to sell your home at fair market value; otherwise, the sale could be considered a gift, which has its own tax implications.

You can also loan money to your children so they can purchase your home. If you go this route, then you’re legally obligated to charge interest, which you can use as income.

Another option is to establish a qualified personal residence trust (QPRT), which is a type of irrevocable trust that transfers your property from your estate to that of the QPRT. Doing so will lower the gift tax value incurred from transferring your assets to your children.

2. Give Your Property to Your Kids as a Gift

You can transfer property as a gift to your children while you’re alive or after you pass away. The latter is recommended, as it affords its own tax benefits. In 2019, transfers of $15,000 or less are exempt from the gift tax.

Although your home is undoubtedly worth more than that, there is also a lifetime exclusion exemption amount from gift and estate tax, which we mentioned earlier. As long as you do not exceed $11.4 million, you will not have to pay taxes on the property you give to your children.

If you do decide to gift your property to your children, it’s recommended to do so under a revocable trust. With a revocable trust, you still have control of the assets under the trust, so you could theoretically change your mind later if you needed to. However, you should consult your mortgage lender first as this could force you to pay your mortgage in full.

3. Transfer Property Deeds

25 states and the District of Columbia allow what’s called a “transfer-on-death” deed. The deed doesn’t come into effect until after you pass away and it allows your home to avoid probate altogether.

If your state permits this type of deed, you can get a state-specific deed that allows you to list a beneficiary (and additional beneficiary) to transfer the property.

4 Mistakes to Avoid When Naming a Beneficiary

Illustration of the four types of mistakes to avoid when naming a beneficiary

If you are unfamiliar with estate planning, then the process of naming beneficiaries can seem quite complicated — and it is, especially if you have a large estate. Additionally, your last wishes could change with your life circumstances.

For instance, if you named your ex-spouse as a primary beneficiary years ago, you probably want to amend that in your will. You might even have more children in the future that you want to impart a portion of your estate to. Whatever the case may be, here are some mistakes to avoid when naming beneficiaries:

1. Naming Outdated Beneficiaries

As with the ex-spouse example, the beneficiaries you named six months ago may not align with your last wishes today. Your beneficiary may predecease you, which would force your assets to go through probate.

Again, you may have more children or marry someone with kids of their own. To avoid having outdated beneficiaries named in your will, make it a habit to review your estate plan every six months to make sure it’s in accordance with your last wishes.

2. Not Naming Alternative Beneficiaries

In the event that your primary beneficiary does happen to pass away before you do, you can name an alternative beneficiary. Doing so ensures that your estate falls into the right hands if you don’t have the chance to make changes to your will before you pass away.

You can add as many alternative beneficiaries as you like. This is also worth considering if you leave part of your estate to a group of people, such as your siblings or nieces and nephews.

If any of them passes away prematurely, would the group as a whole receive a larger percentage of your estate or would you prefer that person’s share be passed along to their children? You can, and should, specify this in your will.

3. Naming Minors as Beneficiaries

If your children are minors and you name them as direct beneficiaries of either your will or life insurance policy, they cannot receive the benefit until they reach the legal age of majority in their state.

It’s likely not in their best interest to receive a large sum of money at that age. One way around this mistake is to name a guardian as the beneficiary. Another workaround is to start a living trust with provisions dictating how much and how often funds can be distributed to your child.

4. Naming Special Needs Children as Beneficiaries

It’s important to understand what constitutes “special needs” in the eyes of the law: A special needs individual is anyone receiving government benefits due to a disability. To qualify for these benefits, the individual must have no more than $2,000 in cash assets available — monetary gifts, settlements, or even inheritance money count towards that amount.

Because the income threshold to qualify for government aid is so low, naming your child with special needs as a beneficiary could tip them over their monthly amount and disqualify them from government aid in the future.

So that you do not jeopardize your child’s eligibility, one option is to start a special needs trust (SNT). Funds deposited into an SNT do not count towards monthly income and therefore do not affect your child’s benefits.

As you can see, estate planning is an intricate and complicated process. It requires you to think about your material possessions in a new light: How will you bestow these gifts upon your children and when? If you start your research and planning today, you’ll be much better off later on.

Additional Resources

Real Estate Terms Glossary
Tax Terms Glossary
Estate Planning Terms Glossary
FreeWill – Free Will Writing Software
What Living Trusts Cannot Do
What’s New – Estate and Gift Tax
Estate Attorney Finder

Sources: ThinkAdvisor | TaxFoundation | Forbes | Investopedia | NOLO

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