Updated July 10, 2019. There are always a few major heirlooms you want to make sure your kids have either before or after you pass away – jewelry, for example, or another sentimental item. One of the most common things people want to leave for the kids can’t be worn, however. Homeowners both young and old worry about the best way to leave their house for their kids, and unfortunately, the answer is a bit more complicated than gifting your grandmother’s engagement ring.
For starters, if you’re relatively young and your spouse is still alive, you probably want to gift it to them. There’s a good chance you co-own the home anyway, and both of your names are on the mortgage. To make sure, check your deed for a "Joint Tenant with Right of Survivorship." You’ll want to make sure your spouse is listed with these "magic words" in your deed, and also that your state recognizes deeds with joint tenants. Talk to your lawyer before making any major moves.
Even if you’re past retirement age, you may still want to leave your house to your spouse instead of your kids. Talk it through with your spouse and your lawyer to build the best estate plan for your situation.
Putting your home in your will
You might already have a will, a.k.a. a written legal document telling the state how to divvy up your assets when you die. You can put just about anything in your will – aforementioned heirlooms, your record collection, a fanny pack full of gold coins – so it shouldn’t surprise you that you can throw your house in there, too. They’re also relatively easy to write. Willing.com is one tool you can use to create a legal will without ever talking to a lawyer.
The big downside to putting your home (or anything) into your will is that all of those assets have to go through a probate court. This court is going to go through and make sure everything is transferred legally, all taxes are paid, and all of your outstanding debts are taken care of. This takes time – time your children may not have.
Another negative aspect to putting your house in a will: if you name more than one person to inherit your home, they each get an undivided interest in it. This means they need to agree on what to do with the home. If one of your kids wants to sell but the other wants to live in it, the kid who wants to sell can take your other kid to court and force them to sell it. This creates a lot of unnecessary drama around your children’s inheritance.
One way to get around that is to create a living trust. Living trusts are useful for a lot of different things, and when it comes to houses, there are two main benefits:
If you transfer your home to your living trust before you die, it doesn’t go through probate court.
You can name a trustee of your living trust who will resolve conflict – in the above example, your trustee could give one child the house while giving the other child assets of equal value.
Transfer on Death
Besides being the name of my new metal band, Transfer on Death is a term used in deeds to pass on property immediately after your death. It’s not legal in every state – check out this list or talk to your lawyer to find out if you can do this in your deed – but in states where it is legal, it’s your best option.
Basically, if you name someone that your home should be transferred to upon your death, the home will automatically become their property the second that you are declared legally dead. No probate court, no living trust, and no fuss.
Dealing with a mortgage
If you’re still holding a mortgage against your house, the transfer of property could become more complicated for your heirs. While previously this advice only applied to younger homeowners, it increasingly is affecting older homeowners, especially after the 2008 financial meltdown.
Mortgage debt doesn’t die with you. While most mortgages require that the owner pay in full if they sell or otherwise transfer ownership of the home, that doesn’t apply when the owner dies.
In those cases, your children (or other heir) would take on the loan – same interest rate, same monthly payment – when they assume ownership of the home. Once they assume ownership, they refinance the home loan as they please.
If your estate has enough money to pay the mortgage in full, your children will get the property for free, effectively. One way to do this is to buy a life insurance policy that specifically covers your mortgage, though depending on how old you are, this may not be the most affordable option.
This all changes if you took out a reverse mortgage or have other debts. When you die, the balance on a reverse mortgage is due immediately. Unless you have money in the estate to cover it, it’s highly likely that your children will have to sell the home to pay off the mortgage. If you have other debts, your home may be seized by the state during the probate court process in order to pay them off.
Talk to a lawyer before making major changes
No matter what you do, talk to a lawyer first, even if it’s just a formal check-in to make sure everything is legal. If you want someone who can take a heavier hand in your estate plan, check out an estate lawyer in your area. Estate lawyers are experts on the laws in your state, and can structure your will, trusts, and deeds to make sure all of your heirs get what you leave them with the minimum amount of fuss.