Baby boomers are now passing on more than $53 trillion to their heirs. One of the largest transfers of wealth across generations in history.
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Much of that good fortune real estateAnd boomers can use their wealth to secure wealth for their descendants, but they need 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 its value for future generations.” is an estate planning attorney based in New York City. Legacy Wealth Counsel. “This is where estate planning meets intergenerational wealth planning.”
A wisely written trust is the key to transferring property
You can leave property to your heirs in a will, but then inheritance can go through a long and expensive legal process called probate, which can be avoided by creating a trust instead. Masu.
“As part of a comprehensive estate plan, real estate may be transferred to a revocable living trust or an irrevocable trust,” Goikman said. “The advantage of trusts is that they can accommodate individual and family needs, including providing constraints on future distributions and investment guidance.”
Avoiding probate is just one of the benefits of using a trust instead of a will.
“One of the key benefits of trust-based real estate transfers is that upon the death of the owner/giver, the beneficiary can receive an increase in the basis of the property that they would not receive with a lifetime gift of real estate. ”
According to the Tax Foundation, the increased threshold adjusts the value of inherited assets to their current fair market value and reduces the capital gains taxes that recipients must pay on the assets.
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$550,000 tax difference on a $600,000 home
Goikman illustrates this point through the example of a couple named Tom and Jane who bought a house in 1980 for $50,000.
“Their attorney created a revocable living trust, renamed the property into a trust, and named their son Bill as the beneficiary,” she said. “When Tom and Jane passed away in 2020, the house was valued at $600,000 and Bill inherited the trust estate at that base value. Upon the death of the owner, the base of the estate increases further.” If Bill inherits the house and sells it, capital gains taxes are calculated based on the difference between the sale price and $600,000. ”
On the other hand, if Tom and Jane gifted the house to Bill during their lifetimes, Bill would be subject to capital gains tax on the difference between the future sale price and the original cost basis of $50,000.
“Additionally, transferring valuable real estate into a trust can provide asset protection options for future generations,” Goikman said. “If you would like to learn more about your options for transferring assets, please consult a qualified estate planning attorney.”
gift alternatives
Baby boomers may also consider leaving assets to their children as gifts.
“Gifting your assets to your heirs while you are alive also helps them secure wealth,” said team leader Boyd Rudy. Miliro Team Keller Williams Realty Living. “Gifting real estate can reduce the size of your estate and avoid inheritance tax. However, it is important to remember that there are limits to the amount you can gift without incurring gift tax.”
The current annual gift tax exemption amount is $17,000. Anything above that is subject to tax, but all but the wealthiest households never pay taxes.
In 2023, the IRS will grant a lifetime gift tax exemption of $12.92 million. If you gift a home, any amount above the $17,000 annual limit is deducted from the value of the property that the agency allows people to gift tax-free over their lifetime. If you’ve already gifted your kids nearly $13 million, the house might make them nervous. Otherwise, the IRS cannot intervene.
Lifetime real estate allows you to continue living in your home even after the transfer
Lifetime real estate is another option for boomers who dream of passing on their real estate to their children, but don’t want to give it up or move away during their lifetime.
“With lifetime real estate, baby boomers retain the right to use and occupy the property until they die, after which their heirs take over ownership,” he said. Up Homes Owner Ryan Fitzgerald, who was featured on Realtor Magazine’s “30 Under 30,” said, “If you want to continue living in your home while avoiding complicated legal procedures after death, this is the right choice for you.” Ta.
A life estate creates a type of joint partnership between the person leaving the inheritance and the person receiving it, and like a trust, assets can be kept out of probate. However, there are many considerations to be made during the parent’s lifetime and after the transfer of assets after death, so consult a professional who specializes in this type of legal arrangement.
Consider a 1031 exchange for investment property
Life estates can help baby boomers who love their current home and want to live there for the rest of their lives. However, when transferring investment property or real estate used for business purposes, a section of the IRS tax code provides a tax break if you sell one property and use the proceeds to purchase another property.
“If you want to sell real estate and reinvest the proceeds, a 1031 exchange may be an option,” Dustin Singer said. dustin buys a house. “This allows you to defer capital gains taxes by reinvesting the proceeds in a similar property. This can be a good way to transfer wealth to your heirs while minimizing your tax liability. ”
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This article was first published GOBankingRates.com: Real Estate 2023: Baby Boomers Transfer Property to Children to Secure Generational Wealth
