Estate Planning After Buying a House
By Liza Hanks
In Silicon Valley, buying a house is a huge investment. And it often comes with an equally huge mortgage. So, along with planning the purchase, it's important for families to plan for what would happen if family members die unexpectedly. Here are some estate planning considerations after the purchase of a home. Creating a thorough estate planning strategy is important to ensure that your family will get to keep their home - and that they don’t fight over its disposition after there's been a death.Make Sure You Have Adequate Life Insurance Coverage
Buying a home is both a big investment and a long-term commitment. With a 30-year mortgage, families commit to being in that home - and making payments on it - for a long time. But what happens if one person dies unexpectedly?
At the very least, I advise my clients to take out an insurance policy that is adequate to pay off the mortgage if a spouse should die unexpectedly. Most two-income families can’t afford a home with one income earner gone, and being able to continue to live in the home without a mortgage payment can mean the difference between having to sell and living comfortably in the home after a death. I tell them to make sure that their insurance coverage is enough to pay the mortgage off, and not to forget to account for taxes or any other expenses that may cause issues for the family.
Some of my clients have one spouse that earns a lot and another that works at home with the kids. While the stay-home spouse isn't earning a salary, their contribution to the family has real economic value. I always advise my clients to consider getting life insurance on the stay-home parent, too -- since hiring enough care providers to take care of those kids while the working spouse travels or manages a high-pressure Silicon Valley 24/7 job can be prohibitively expensive.
Beyond coverage for the mortgage itself, I encourage my clients to make sure that their life insurance policy provides enough capital for the family to settle other debts, and, if they can afford it, to provide enough of a benefit that the family could comfortably live off the income from the death benefit without having to touch the principal. (This was easier back in the day when interest rates weren't so low.)A Good Estate Plan Means Thinking Things Through
Beyond the financial considerations of owning a home, deciding how to leave it to children at death can be difficult, especially if (as is often the case) it is the single biggest asset a family owns and it is located in a really good school district. I've written many estate plans that provide for a child's guardian (often a grandparent or aunt or uncle) to come live in a family home until the youngest child has finished high school. This can make a lot of sense, but it requires some thought. If that home is also the biggest asset in the estate, can the family afford not to sell it immediately after the deaths to provide the children with adequate resources? If the house stays in trust until all of the children graduate from high school, how will the carrying costs of the house (taxes, maintenance, and insurance) be paid for? If a guardian lives in that house for many years, what will they do and where will they live when the kids do graduate? Adequate life insurance can be a key component in this kind of plan, both for providing immediate cash to a family and for providing sufficient assets to maintain that home over time and provide help to an elder family member if they need to relocate at some point.Distributing a House and Assets Among Children
The most equitable way to deal with a house after death is to make sure all of the children share equally in the estate. But, of course, things aren't always that simple. If one child wants the house, and others don't, an equitable distribution can still be made, but an estate has to have adequate resources to make that work. And, in California, property tax reassessment is always an issue when real property is distributed. Transfers between parents and children are excluded from reassessment. But, if a parent leaves a house equally to three children, but one child buys the other two out after a death, property taxes will be reassessed for a portion of the house because transfers between siblings are not excluded from reassessment. Again, adequate life insurance can be a key component in any estate plan in which an allocation of real property to one child is something that parents want to accomplish.