Long gone are the days when your children could simply move into your home after your death and not worry about legal or tax implications.

These days, you must choose between several options for leaving what is likely your most valuable asset to your heirs. And although each one has its own advantages and disadvantages, they all share the same requirement — planning.

Here are six options to consider:

1. Joint Tenancy. This form of ownership involves two or more individuals. When one joint tenant dies, the other immediately becomes the property owner. This strategy is often used for family residences where a surviving spouse plans to continue using the property as his or her home.

If you create a joint tenancy with someone other than your spouse, you can create tax liabilities for yourself. That’s because your home is then treated as a partial gift subject to Federal gift taxes. In addition, the entire value of the home will be counted in assessing Federal estate taxes upon your death! You have certain annual and lifetime tax exemptions that can shield you from estate and gift taxes, and it is important that a qualified attorney or CPA review your personal situation before entering into any joint tenancy.

2. Intestacy. This situation occurs when you die without having a legally valid Will. What results is your assets — including your home — are distributed according to your state’s laws.

In New York, distribution occurs in the following order: your spouse and your children split everything 50/50 (after the first $50,000 of assets). If you die without a spouse or children, your assets would go to your parents, siblings, aunts, uncles and cousins in a specified order. So if you want to leave your property to people other than family members specified in your state’s laws of intestate succession (or in different proportions), you need a Will, trust or other legal arrangement.

3. Will. When you include a provision in your Will stating that you’re leaving your home to your child (or other person), you keep control over your property while you’re alive. After you die, your child will get your home after the property goes through probate. (Warning: Probate can be a lengthy and expensive process.)

A Will also allows you to determine your executor and how your assets are divided up. If you intend to leave your home to your spouse, then taxes aren’t an issue. However, a Will won’t eliminate taxes when you leave your home to another heir without additional planning.

4. Living Trust. The benefit of this strategy is flexibility. You transfer ownership of assets such as your home to the trust, but you remain the trustee. As a result, you can change the terms, while giving away or selling assets as you please.

A living trust doesn’t require any court proceeding to distribute your assets, so the process is quicker and cheaper when compared to probating a Will. In fact, distribution happens almost immediately. As with a Will, a living trust by itself does not reduce estate taxes without specific additional planning. Furthermore, a living trust does not protect your home from creditors or Medicaid.

5. Irrevocable Trust. Irrevocable trusts are often used to eliminate estate taxes (e.g., a QPRT or “qualified personal residence trust”) or protect assets from Medicaid claims (e.g. an IIOT or “irrevocable income only trust”). Similar to a living trust, property transferred to your heirs through an irrevocable trust doesn’t require probate. Unlike a living trust, you can’t change or take back assets transferred to an irrevocable trust.

You are also unable to modify beneficiaries or rewrite any of the trust’s terms. However, if drafted properly, certain types of irrevocable trusts can ensure your property and all future appreciation comes out of your taxable estate, which can lessen tax liability for your heirs. They can also protect your home from liability claims.

6. Life Estate. Life estate transfers are commonly used to protect assets from Medicaid and to avoid probate. In simplified terms, you give your home to your child or other person, but retain a legal right to live in the home, rent free, for the rest of your life. You cannot be forced out of the home and neither you nor your child can sell it without the other’s permission.

At your death, your child automatically owns the home without going through probate (similar to a joint tenancy). Life estate transfers can have significant tax implications, so it is important to seek professional advice before deciding to use the technique.

Regardless of what option you choose, the bottom line is a proper estate plan ensures you (not the state or IRS) control who receives your home. Without a legal plan in place, you risk leaving sizable tax bill behind and causing arguments and fights within your family. But, as you now know, there are ways to avoid tax penalties and prevent family strife. So start setting up your strategy today.

Author Bio: Joseph P. Donlon, Esq., CFP is a New York estate planning attorney and the founder of Donlon & Associates, PC. He is a frequent lecturer on estate planning topics and is routinely invited to speak before financial institutions, civic groups and business gatherings. Get more of his free tips and insider information about how to protect your family, reduce estate taxes and safeguard your assets at http://www.donlonlaw.com.

Category: Legal
Keywords: living trust,irrevocable trust,joint tenancy,protect assets,leave home to heirs,new york estate plan