5. A beneficiary designation—a transfer on death (TOD) deed
Some states offer a TOD designation on a deed which essentially names a beneficiary for that property. With a TOD designation, assets pass outside probate, so it's quick and private, and the heirs still get a step-up in basis for tax purposes, which means the value of the house is adjusted to current market value. It may also be less expensive than setting up a trust.
There are some drawbacks to a TOD designation. It only allows individuals or charities as beneficiaries, not a trustee under a trust. That means that if a child is still young at the time of the transfer, they would directly own the home, which may not be practical. There is also no contingency, so if the child named as beneficiary dies before the original owner, there is no provision to skip a generation and pass the asset to their children—the TOD deed would have to be updated by the owner. Additionally, if the home is passed to an adult receiving government benefits, it could affect their eligibility.
Tip: TOD deed options are limited by state law, and many states do not offer this option at all. Check with your attorney or tax advisor to determine whether this option is available and would be appropriate for your circumstances.
6. Through selling
If it's unlikely that children will want the home, consider selling it and renting a home later in life. Issues like maintenance, health, and lifestyle may be more important than the financial considerations here, but be sure to consider the tax impact of this decision.
Current federal tax law allows a capital gains exclusion of either $250,000 (for an individual) or $500,000 (for a married couple filing jointly) on the sale of a house, provided that they have lived in that house for 2 of the previous 5 years, and that the home meets the residency requirements. Gains above that amount are taxed. Inheriting a property comes with a step-up in basis (which means it's reassessed at current market value) potentially eliminating capital gains tax.
The bottom line
A home can be the most valuable asset in an estate. If you don't take any action and die without a will or having made any other arrangements, your assets will pass according to your state intestacy laws, which may or may not reflect your wishes. This may include going through probate—a process that is potentially expensive, public, slow, and complicated.
The transfer of real estate assets can pose unique legal, tax, and emotional issues for a family, so it may be beneficial to work with a professional to help protect yourself and your loved ones. It's important to come up with a plan that makes sense for you, and your heirs, and to create an efficient strategy to execute it.