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A lot of my clients ask me if they should transfer their primary residence to their children before they pass away. For the most part that answer is typically a rescinding negative.
In Florida, your primary residence is considered to be your Homestead. Homestead provides you certain benefits and restrictions. The benefits include the tax saving from ad valorem taxation (property taxes) and the protection against creditors. However, those benefits come with certain restrictions, most notably who you can transfer your Homestead to in a last will and testament or a trust.
First let’s analyze why you would want to transfer your Homestead to your children before you pass away. It usually boils down to avoiding probate court when you pass away.
A lot of my clients tell me that they are afraid that the State of Florida will keep their property if they don’t transfer their Homestead to their children. The second reason I usually get as well is so that the children don’t have to go through probate court and have the expenses of administration.
The top 2 reasons why not to do this type of transfer involve Florida Homestead benefits and income tax savings.
The first thing that you should determine is whether you are married or not. If you are married, then you will need the consent of your spouse to transfer your Homestead property.
If your children do not live with you in the property, then your primary residence will lose the Homestead protection because in order to receive the Homestead benefits you must own title to the property and reside in it. That means that if your children have creditor problems, or if they are sued because of some wrongdoing or some contract issue, then the creditors of your children will be able to attack the property you transferred to them because if they do not reside in the property then it cannot be their Homestead.
In the event that your children reside with you then they will also get the benefits of Homestead protection and they will be protected as well. However, this is a big risk to take, as children move away from home all the time.
Not only will the property lose the creditor protection, but also any property tax savings that it was enjoying. Losing Homestead alone and the benefits that it provides is a huge reason why not to transfer your primary residence to your children.
The second reason why you should think twice before transferring your Homestead to your children is the income tax savings that your children will get if they acquire the Homestead through inheritance as compared to a gift.
If the children acquire your Homestead through a gift, they will get what we tax lawyers call a transfer basis. How does transfer basis work you may ask? Let me give you an example to make the illustration clear.
If you bought your Homestead for the price of $100,000 that is your cost basis. Now let’s assume that a few years have passed, and your property is now worth $500,000. If you were to sell your Homestead then there will be $400,000 of gain that would be subject to income tax, subject to some exceptions. Now let’s consider what will happen if you gifted that same property to your children. In this case, your children will receive a transfer basis, meaning that in the hands of your children, their basis will also be $100,000. Therefore, if when you pass away, they were to sell the property to a third party, they will also have $400,000 of taxable income taxed gain.
Now let’s analyze the inheritance scenario. If your children acquire your Homestead through inheritance, not only will they receive the property free and clear of any creditors due to the property being considered your Homestead, they will also receive a step-up in basis of the property. What does this mean? Well, using the same example above, your children instead of having a basis of $100,000, their basis will be stepped-up to fair market value, in this case being $500,000. If your children turn around and sell the property, they will have no income tax liability assuming the property does not increase in value.
Before you go running and create a last will and testament or a trust, lets consider the restrictions on the transfer of your Homestead at death. Homestead law states that if you are survived by a spouse or any minor children, then you may not transfer your Homestead in a Will or a trust. However, if you do not have any minor children then you may transfer your Homestead in a Will or a Trust only to your spouse. If you do not have any spouse or minor children, then you may transfer your Homestead to who ever you want.
The first question when transferring the Homestead to your children in a Will or a trust is whether you are married or not. If you are married, then the Homestead may only go to your spouse unless he or she signs a Homestead waiver. However, in most situations, you may be okay with your spouse inheriting your Homestead and she will need a place to reside until he or she passes away.
At this point if your surviving spouse does the proper estate planning, then your children will ultimately acquire the Homestead through inheritance.
One of the drawbacks to this method is if for example you have a blended family. Meaning that your children are not from the current marriage. When you pass away and your spouse inherits the Homestead, then it will be completely up to her of what to do with the property. He or she may sell it or transfer it to someone else altogether.
Usually what estate planning attorneys do in this situation is to set up revocable trusts waiving Homestead rights at death through Section 732.702 of the Florida Statutes. What this type of estate planning allows is for the surviving spouse to be able to reside in the property and be taken care of until death, and the property being transferred to your children at the death of the surviving spouse.
Now you may ask yourself, are there other planning opportunities where the children can inherit your Homestead without having to go through the Probate court system. The answer to that question is it depends on the facts and circumstances.
The most widely used tool by estate planning attorneys in order to avoid probate court is to use revocable living trusts. In some situations, the use a of life enhanced estate deed, more commonly called Lady Bird Deed, is sometimes utilized.
In conclusion, it is important to talk to an estate planning attorney knowledgeable in these issues before transferring your Homestead to your children. I seen clients lose their Homestead and consequently their asset protection because they just went ahead and did it themselves because a neighbor or family member told them it was a good idea.
Most estate planning attorneys in Miami offers free consultations. Do not shy away from consulting an estate planning attorney because you think it will be too costly. The bottom line is that the estate planning attorney will make sure to analyze your situation, offer options that work best for you, and ultimately get to your desired result by protecting you and your family.
Make sure to share this article if you find it useful. I can guarantee that a family member or a friend has the same question, and this may help them tremendously to get informed.
As a disclaimer, always seek the advice of a licensed estate planning attorney so they can analyze your specific situation, this article is for informational purpose, and does not create an attorney-client relationship.