Special handling needed to protect the homestead

Helping clients keep their homes safe for the next generation

Oct 24, 2010 @ 12:01 am

By Richard J. Koreto

Family homes, because of their great value and emotional ties, are a challenge in estate planning and require special handling.

Financial advisers should be prepared to help families manage generational transfers wisely to avoid devastating expenses and emotional turmoil.

“In estate planning, the main issue is to help clients articulate their goals for the house,” said Rich Arzaga, founder and chief executive of Cornerstone Wealth Management Inc. “Sometimes it's the value of the house, but other times, it's the house itself.”

That is, in some families, it becomes emotional. Sometimes the parents want one of their children to own and live in that house, Mr. Arzaga said.

If that isn't the case, “let your clients know they have to leave instructions in a will, letting their children know it is expected they will sell it and split the proceeds,” he said.

Unfortunately, poor planning can make such wills moot, stripping the house of its value. Death and taxes are the two great certainties, and in the case of inherited homes, they arrive together.

The estate tax expired Dec. 31, but it comes back next year, with at least a $1 million floor or perhaps a return to the $3.5 million of last year. A nicely appreciated home can put owners over the top, and the heirs may not have the cash for taxes.


Even if the estate comes nowhere near the expected $3.5 million federal level, a state estate tax can hit hard. New York's estate tax kicks in after $1 million, and in New Jersey, the floor is just $675,000.

Typically, clients will get a deduction — not a credit — on their federal returns for their estate tax, so a double hit is possible.

End-of-life costs, such as nursing-home bills, can also force the sale of a house, ending parents' dreams of leaving it to their children.

Fortunately, many advisers are able to ensure that the family home makes it to the next generation. The key is advanced planning and discussions with the client.

Like many advisers, Caryn B. Keppler, a partner in the law firm Hartman & Craven LLP, recommends a qualified-personal-residence trust as an efficient estate-planning tool.

“It can be a great way to give away a home,” she said.

Such a trust allows the parents to retain rights for a certain amount of time and then pass them on to heirs. It saves on estate and gift taxes by essentially reducing the value of the house for gift tax purposes.

The family sets a term for the trust, based on the parents' life expectancy and health. They have to survive the term for the technique to be successful. If the term is too short, the retained interest isn't substantial, and clients don't get much of a break.

For tax savings, Jeff Duncan, president and founder of Duncan Financial Management Inc., suggests an irrevocable life insurance trust.

For example, consider a house with a $5 million value and an estate tax floor of $3.5 million. That leaves the estate on the hook for $1.5 million at a possible 50% rate.

“You buy a $750,000 policy inside an ILIT — that makes it separate from the estate and available to pay the estate tax,” Mr. Duncan said.

For clients who are concerned about losing a house to nursing-home expenses, Alfred J. LaRosa, a partner in public accounting firm EisnerLubin LLP, recommends a “life estate.”

This gives the owner the right to live in a residence for the rest of his or her life and pass it on to the children. It is especially useful in protecting the house because it keeps it off the table when it comes time to settle medical debts.


But this isn't a last-minute technique, Mr. LaRosa said.

“There's a five-year look-back, so you have to do it in advance, and there could be tax implications. So advisers and their clients should consult with elder-care specialists,” Mr. LaRosa said.

If everyone is amenable, irrevocable trusts are useful in tax planning — but the key word is “amenable,” he said.

The grantor, i.e., the homeowner, may not be emotionally ready to give up control. A trust can do a great job of keeping assets out of the estate, but advisers have to alert their clients to this first.

In fact, if a grantor is a trustee, even in an irrevocable trust, there is a danger that the trust assets will be deemed part of the estate, effectively negating the trust.

The techniques that advisers use will depend on clients' situations and personalities. But no matter what, the earlier that advisers get started, the more options they and their clients will have.


What do you think?

View comments

Recommended for you

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


Martin Dempsey: Geopolitical hotspots (and how they could impact investing)

What are the big international hotspots and how could it affect advisers and investors. Gen. Martin Dempsey, the former chairman of the joinst chiefs of staff, offers his unique perspective.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

One adviser's story of losing his son to the opioid epidemic

John W. Brower, president and CEO of JW Brower & Associates, shares the story behind his son's death from a heroin overdose and how it inspired him to help others break the cycle of addiction.

Tax reform will boost food, chemicals, rail stocks. Technology? Not so much

Conagra and Berkshire Hathaway are two stocks that should benefit most from changes in the tax code.

Brace for steepest rate hikes since 2006 in new year

Citigroup, JPMorgan Chase predict average interest rates across advanced economies will climb to at least 1 percent in 2018.

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

Finra bars former UBS rep for private securities transactions

Regulator says Kenneth Tyrrell engaged in undisclosed trades worth $13 million.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print