Living Wills and how they are used in your home sale

What do you do when your aged parent is in his or her last days and they have a living trust that holds their property which is supposed to be passed on to the heirs? Good question.

This question came into my inbox about what the siblings were supposed to do with the home that also had a small mortgage (in the name of the trust). Furthermore, the trust lists one of the sisters with an option to acquire the house. If that sister wants to exercise that option – how do you handle it?

First of all – I AM NOT AN ATTORNEY NOR AN ACCOUNTANT – the information is harvested from hundreds of hours and many cases that I’ve had to deal with the heirs of a property. Do your due diligence – and this article should really be used to just point you in the right direction to TALK WITH A PROFESSIONAL.

Meanwhile, there are several options – and in this case, the immediate division of the trust/estate could easily follow these steps:

1 – The sister sells her current home (if she has one); refinances mom’s home, and “pays off” the siblings as equal heirs of the estate. The challenge you have is in the way to calculate property taxes, value of the property, and other issues. These are not real estate questions which takes us to the next step:

2 – Talk with the estate lawyer and your accountant. The attorney will answer what is the legal way to move in your state; and an accountant will guide you in saving the assets from tax liability and maximizing your inheritance.

The fact that the mother had established a living trust demonstrates how important she viewed these decisions for her and her family. If you are in that situation, you should view them with the same respect. Mom or dad put all this together to disburse with the estate and the law and his or her wishes should be followed as it was established.

Imagine what kind of decisions and negotiating you would be doing with your siblings at this point if mom or dad had not established a living trust – the potential for broken relationships is astounding. Emotions would run high, and I’m sure the “poorest” sibling would be explaining why they “deserve” more than the others. Sorry – but none of those reasons flow into this discussion. Thankfully – you have a trust.

Instead, your parent wrote down ahead of time, with the appropriate professionals, how to disburse the property and the proceeds. The decisions have been made already, you just need to make sure you carry them out with as little tax liability and legal hassle as possible.

Now, regarding the passing of the property from your parent’s trust to your sister, be careful about that. Keep in mind that the laws regarding inheritance deal with the fact that the property is your mother’s at this time – not your sister’s. If your sister takes possession of the property – it’s no longer your mother’s. Thus, if she were to take possession, refinance and then pass money to you – ask your attorney/accountant if it’s still considered inheritance money from your mother rather than a gift from your sister.

If it’s a gift from your sister – there would definitely be tax consequences. Nevertheless, once the house passes hands in an inheritance, the value for tax and capital gains purposes is the fair market value of the property at the time of the transfer.

For instance, if your mother bought the house for $150,000 20 years ago and sold the house before she died at $350,000, the basis would be the value of the home when she bought it years ago. If you and your sisters take possession, the basis would be the new value of $350,000.

Though the house is already owned by a living trust, you may also want to talk with the estate planning attorney about using a qualified property residential trust (QPRT) in which to hold the property.

FindLaw.com gives a very good layman’s explanation of how a QPRT works:

“A Qualified Personal Residence Trust (commonly called a “QPRT”) is sometimes called a way in which you may give your home away and live in it, too. In reality, it is a way of transferring your home to another party (usually children) at a reduced transfer tax cost … Under a QPRT, your home is transferred to the trust and you retain the right to live in the home for a specified period of time. At the end of the period, you may provide that the home be distributed to your children or to a trust for them.”

A QPRT, in essence, reduces the value of the overall estate, and thus, the tax liability. The problem you may face is that your mother is already comatose and cannot legally sign for the trust. In addition, if she is at the brink of death, you may not be able to place such a short time limit on the trust, i.e. less than a year. Again, talk with your attorney with your particulars.

Anthony owns and operates Anthony Carr Associates LLC, powered by Re/Max West End, in Northern Virginia. He holds associate broker licenses in Virginia, Maryland and Washington DC. Steady, Stable, Trusted.

Anthony Carr

Anthony Carr is a seasoned real estate professional with Anthony Carr Associates LLC, affiliated with RE/MAX West End, a powerful office serving the whole VA|MD|DC market. He has helped sellers, buyers and investors just like you who desire to build their personal wealth through home ownership. Working with Anthony and his team, you'll benefit from the deep experience he has corralled from his diverse career - investor, Realtor, published author, blogger and problem solver. Anthony authored the book “Real Estate Investing Made Simple: A commonsense approach to building wealth”; and was a contributing writer to the book, “The Best Real Estate Advice I Ever Received." He is married to his bride Corinne; father to Andrew, Austin, Rachel and Robyn; and Pop-Pop to three energetic grand kids!

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Living Trust, Qualified Personal Residence Trust