Creating a will is one of the most important steps in securing your family’s future and ensuring your wishes are honored. However, a will is not a set-it-and-forget-it document. Life is full of changes, and your estate plan should evolve to reflect them. Here’s how often you should update your will and what circumstances might prompt a review.
1. Mortgage Considerations
If the property is subject to a mortgage, which is common, it comes with terms that can impact your ability to transfer ownership. One key term to be aware of is the “due-on-sale” clause. This type of clause prohibits the transfer of real estate without the lender’s consent—even if it is a gift. In other words, gifting real estate without obtaining prior approval from the lender could put you in default and lead to foreclosure. Before you make any gift, review your mortgage documents and speak with your lender about your plans.
2. Tax Considerations
Even though no money changes hands, you must determine whether the IRS will treat a gift of real estate as a taxable event. As the person giving the gift (the “donor”), you will need to report the gift to the IRS and possibly pay a gift tax, unless the value of the real estate exceeds the annual gift exemption. You may not have to pay the gift tax if the value of the real estate falls within the lifetime estate tax exemption. Beyond the federal income tax considerations, there may also be state and local tax implications as well. You must consult with your accountant or tax advisor to understand the federal, state, and local tax implications before completing the gift.
3. Practical Considerations
There are also practical considerations to real estate ownership, which may be overlooked in the gifting process. As obvious as it sounds, you want the recipient to understand the ongoing responsibilities and costs of real estate ownership, including property taxes, insurance, and maintenance. You will also make sure any agreements related to the real estate—such as insurance policies or leases—are properly updated or transferred to the recipient. Before you gift real estate, talk with the recipient to make sure they are ready for the responsibilities of real estate ownership and willing to accept the gift.
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