Personal legacy planning3 effective strategies for transferring real estate to heirs

Key things to know

  • Transferring family real estate to heirs requires careful alignment and strategizing.

  • Setting aside funds for future property maintenance is critical to making inherited property a benefit rather than a burden.

  • Ways to structure the transfer of property include selling the property outright, gifting the property during one's lifetime or bequeathing the property after death.

Determining how to transfer real estate to your heirs is one of the biggest estate planning decisions you may have to make. This includes the family home, but it could also include one or more vacation homes or a family farm.

There’s probably a lot of sentimental value in these kinds of property. But it’s important to remove emotions from the equation as you plan the best strategy for passing property down to your children and grandchildren.

Aligning family interests in real estate transfers

Justin Flach, managing director of wealth strategy for Ascent Capital Management of U.S. Bank, has helped numerous families plan strategies for transferring property to heirs.

“The most important thing is to have alignment of interest between property owners and heirs,” he says. “There are lots of different ways to structure the transfer, but first you have to determine whether your heirs want to receive the property or not.”

Real estate is different from most other types of inherited assets, such as investment securities, personal belongings like jewelry and collectables, or other types of real property like cars, boats and RVs. There will likely be significant, long-term repair and maintenance costs, along with property taxes, that can turn property ownership from a blessing to a burden if they’re not funded.


“There are lots of different ways to structure the transfer [of real estate], but first you have to determine whether your heirs want to receive the property or not.”

- Justin Flach, managing director of wealth strategy, Ascent Private Capital Management


As part of the estate planning process, Flach recommends setting aside funds in a trust that are dedicated for this purpose. “You want to set up your heirs for success, not failure,” he says. “Therefore, think ahead of time about how you can help them pay these expenses so the property doesn’t become an unwelcome burden.”

Flach also recommends devising an exit strategy in case one heir decides they no longer want to participate in ownership of the property.

“With a vacation home, for example, one child might not be using it as much as the others and no longer wants to have to pay for upkeep, taxes and association fees,” he says. “A life insurance policy held alongside the property in an LLC or trust could provide liquid funds to buy out a sibling’s ownership share of the property, lessening the potential for misunderstandings and potential conflict.”

Three ways to structure real estate transfers to heirs

There are several different ways to arrange the transfer of family property to heirs, including the following:

1. Sell the property outright

This could be a good option if you want to downsize to a smaller home or move to a new area later in life and would like the proceeds from a home sale to help make the move. Keep in mind, however, that you should sell the property at fair market value; otherwise, the difference between the sale price and the fair market value would be considered a gift and subject to gift taxes.

Alternatively, you could sell the home to your children and continue to live in it. In this scenario, you must pay market rent to your children, says Flach, or the IRS could unwind the sale. You could loan the money to your children to buy the home, but you must charge interest and claim the interest earned as income on your tax return. The IRS publishes the Applicable Federal Rates (AFRs) for loans between related parties each month.

2. Gift the property during your lifetime

Since real estate usually appreciates over time, this strategy allows property appreciation to occur outside of your estate, which could reduce estate taxes on your heirs. The best way to gift property during your lifetime is usually to place it into an irrevocable trust.

This will protect the property against potential creditors and allow you to use your lifetime estate tax exemption, which in 2024 is $13.61 million for individuals and $27.22 million for married couples filing jointly. Keep in mind that if your heirs sell the home, the cost basis will be calculated using your original purchase price, which could boost the capital gains subject to tax.

According to Flach, qualified personal residence trusts (QPRTs) are an effective way to gift property to heirs and remove its value from your estate during the current high interest rate environment. “The retained interest is worth more now, so you use less of your lifetime exemption,” he says. “After the retained period is over, ownership of the property will pass to the beneficiaries of the trust.”

3. Bequeath the property to heirs

There are three main ways to pass family real estate to heirs after you die:

  1. As part of your will. This is perhaps the simplest technique, allowing you to designate which of your heirs will receive property and in what proportions. However, your will might have to go through probate, which can be costly and delay settlement of your estate.
  2. In a revocable living trust. This will avoid probate and give you more control over how the property is managed, including under what conditions it may be sold. If none of your heirs want to live in the property, the trust can sell it after your death and distribute the proceeds to them.
  3. Using a transfer-on-death deed. This is similar to a payable-on-death bank account designation that transfers funds to heirs. It also avoids the time and expense of probate for your heirs. Payable-on-death deeds are currently available in 29 states and the District of Columbia.

Ensure open and honest communication

It’s critical to speak openly and honestly with all family members who could be affected by your estate planning decisions about real estate.

“The biggest problems I see occur when parents don’t talk to their children about this issue and strategize together with them,” says Flach. “It’s also important to get input from financial professionals, including your tax advisor and wealth manager, to make the best long-term decisions for everyone involved.”

Learn how Ascent Private Capital Management of U.S. Bank can work closely with you and your family to lay the groundwork for a successful transition of wealth.

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