Baby boomers are currently handing down more than $53 trillion to their heirs in one of the greatest transfers of generational wealth in history.
Much of that fortune is in real estate, and boomers can use their properties to secure their wealth for posterity — but they have to do it right.
“Individuals with accumulated wealth often consider how best to transfer that wealth to their loved ones — and how to preserve and grow value for future generations,” said Melissa Goikhman, a New York City-based estate planning attorney and founder of Legacy Wealth Counsel. “This is where estate planning and intergenerational wealth planning meet.”
A Smartly Written Trust Is the Key To Transferring Property
You can leave property to your heirs in a will, but then the inheritance will go through a potentially long and costly legal process called probate, which you can avoid by creating a trust instead.
“As part of a comprehensive estate plan, real property may be transferred into a revocable living trust or an irrevocable trust,” Goikhman said. “The beauty of a trust is that it can be tailored to address the needs of individuals and families, including by providing constraints on distribution in the future and guidance on investment.”
Dodging probate is only one advantage of using a trust instead of a will.
“One major benefit of trust-based real estate transfers is that upon the death of the owner/grantor, beneficiaries may receive a step up in basis for the real estate that they would not achieve with a lifetime gift of real estate,” Goikhman said.
According to the Tax Foundation, a step up in basis adjusts the value of inherited assets to their current fair market value and reduces capital gains taxes that the recipient owes on the asset.
Goikhman illustrated the point through an example of a couple named Tom and Jane, who bought their home for $50,000 in 1980.
“Their attorney drew up a revocable living trust and retitled that property into the trust, naming their son Bill as beneficiary,” she said. “When Tom and Jane passed away in 2020, the house was worth $600,000, and Bill inherited the property in trust at that base value — real property gets a stepped-up basis at the owner’s death. If Bill sells the home upon inheriting it, the capital gains tax would be calculated on the difference between sale price and $600,000.”
On the other hand, had Tom and Jane gifted the house to Bill before their deaths, Bill would face a capital gains tax on the difference between the future sale price and the original cost basis of $50,000.
“Transferring valuable real property into a trust, additionally, can provide asset protection options for future generations,” Goikhman said. “Talk to a qualified estate planning attorney to learn more about options to transfer wealth.”
Boomers can also consider leaving property to their children as a gift.
“Gifting your property to your heirs while you’re still alive can also help them secure wealth,” said Boyd Rudy, team leader of MiReloTeam Keller Williams Realty Living. “By gifting property, you can reduce the size of your estate and avoid estate taxes. However, it’s important to keep in mind that there are limits to how much you can gift without triggering gift taxes.”
The annual gift tax exclusion is $17,000 for 2023 — $18,000 for 2024. Anything over that is subject to taxation, but all but the wealthiest households will never pay it.
For 2023, the IRS allows a lifetime gift tax exemption of $12.92 million, which will increase to $13.61 million in 2024. If you gift a home, any value over the annual limit is subtracted from the value of assets that the agency allows people to give away over the course of their lives tax-free. If you’ve already gifted your children something approaching $13 million, a house might put them over the edge. If not, the IRS won’t get a bite.
A life estate is another option for boomers who dream of transferring their property to their children but don’t want to give it up or move out while they’re alive.
“With a life estate, the baby boomer retains the right to use and reside in the property until their passing, after which the heir assumes ownership,” said Uphomes owner Ryan Fitzgerald, who was featured in Realtor Magazine’s 30 Under 30. “This is a suitable choice if you wish to continue living in your home while avoiding posthumous legal complexities.”
Life estates create a kind of joint partnership between the people leaving and receiving the inheritance, and like trusts, they can keep the asset out of probate. But there are many considerations while the parent is alive and after the asset transfers after death, so work with a professional specializing in this kind of legal arrangement.
Consider a 1031 Exchange for Investment Properties
A life estate can help boomers who love the homes they’re in and want to live out their lives there. But if you’re passing on an investment property or one you use for business purposes, a section of the IRS tax code gives you a tax break for selling one piece of real estate and using the gains to buy another.
“If you’re looking to sell a property and reinvest the proceeds, a 1031 exchange may be an option,” said Dustin Singer of Dustin Buys Houses. “This allows you to defer capital gains taxes by reinvesting the proceeds into a similar property. This can be a good way to transfer wealth to your heirs while also minimizing tax liability.”
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