3432: [Part 1] Transferring a Primary Residence to Children by Sean Mullaney of FI Tax Guy on Legacy Decisions

What It Covers

Sean Mullaney examines tax and legal strategies for transferring primary residences to children, comparing revocable living trusts versus joint tenancy arrangements. Part one focuses on planning for minor children and addresses common misconceptions about capital gains tax implications for adult children inheriting property.

Key Questions Answered

• •Revocable Living Trusts for Minor Children: Married couples with minor children should transfer their primary residence to a revocable living trust managed by a trustee. This provides flexibility to sell, rent, or maintain the home for children and guardians while avoiding probate and allowing easy corrections while grantors remain alive.
• •Tax Neutrality of Trusts: Revocable living trusts maintain the grantor's existing tax situation without requiring changes to tax returns. The $250,000 per person capital gains exclusion on primary residences remains intact, no gift tax return filing is required, and beneficiaries receive full step-up in basis at fair market value upon inheritance.
• •Joint Tenancy Basis Step-Up: Adult children added to property titles as joint tenants with rights of survivorship receive full fair market value basis in the inherited home, even without contributing to acquisition costs. For example, a home purchased for $300,000 and valued at $600,000 at death transfers with $600,000 stepped-up basis.
• •Estate Planning Alternatives: Inheriting family homes can burden heirs with maintenance costs, property taxes, insurance, legal fees, and emotional complications when multiple parties share ownership. Consider stipulating that real estate be sold upon death with proceeds divided evenly, treating property like any other estate asset rather than special legacy items.