Estate Planning for Your Principal Residence.

Various recent developments in the federal, state and local laws, combined with the significant appreciation in the value of clients' principal residences generally over the past decades, have resulted in the need for greater attention to estate planning for the clients' principal residence, especially in the case of Missouri married couples.

Recent Development #1 - $500,000/$250,000 maximum exclusion for gain on the sale of a principal residence has not increased in almost 30 years, while the value of the average home has more than doubled over the same time period.

On average, a home purchased for $500,000 in 1997, or when the current maximum capital gain exclusion amounts were passed, would be worth over $1.1 million, today, or over $100,000 more than the $500,000 maximum capital gains exclusion amount for a married couple, and over $350,000 more than the $250,000 maximum capital gains exclusion amount for a single individual. This potential disparity between the built-in taxable gain on a home and the maximum principal residence capital gains exclusion can be even greater for homes purchased before May 7, 1997, because the income tax basis rules for principal residences purchased before May 7, 1997 may require a reduction for any gain not recognized on the sale of the taxpayer's previous principal residence.

What this all means is that now, more than ever, estate planning requires a careful examination of the proper titling of a married couple's principal residence, in order to minimize income taxes on its eventual sale. This topic should be addressed at every married couple's estate planning update meeting, since the optimum estate planning recommendation will depend on various factors unique to each couple's particular situation.

Recent Development #2 - New Missouri Qualified Spousal Trust law protects a surviving spouse from lawsuits to the extent the trust is funded during the couple's joint lifetime.

As discussed in our previous client newsletters, in August of 2024 Missouri revised its existing Qualified Spousal Trust Law to add asset protection for surviving spouses to the extent the Qualified Spousal Trust is funded during a married couple's joint lifetime. This new and significant asset protection law is unique to Missouri married couple residents.

Given this beneficial new development, married couple clients who currently have executed beneficiary deeds of their home to their Qualified Spousal Trust, effective at the death of the second spouse to pass, should consider transferring the current legal title to their home to their trust, in order to avail themselves of the asset protection benefits of the new law. Taking this step will not only help the couple insulate their home from potential lawsuits during their joint lifetime, but will also provide the surviving spouse a level of asset protection, not previously available, after the first spouse dies.

Recent Development #3 - The Senior Real Property Tax Freeze.

Missouri residents who are age 62 or older by December 31 of the current year can have their real property taxes on their principal residence "frozen" at their current level, provided the owner(s) timely apply for the freeze in the county in which they reside. The question this raises is whether a principal residence transferred to a trust, in the manner described above, will still qualify for the freeze.

What we are recommending is that clients who are eligible for the real property tax freeze, and who choose to transfer legal title to their principal residence to their trust(s), e.g., in order to avail themselves of the new asset protection benefits described above, revise their existing trust instruments to specifically provide that (i) they retain the right to reside in the residence for their joint lifetime and for the lifetime of the surviving spouse, and (ii) they remain principally liable for any real property taxes associated with the residence.

Recent Development #4 - Homeowners' Insurance Consequences of Transferring Any Real Property to a Trust or Other Entity.

Whether it is the client's home or any other real property, when the property is transferred to a trust or any other legal entity, such as a limited liability company, it must be remembered that the transferor is no longer the legal owner of the property. As such, the transferor should contact his or her homeowners' or other insurance agent, to ensure that the insurance policy on the real property is properly structured so that the property remains protected against loss after the transfer (sometimes referred to as adding the trust or other entity as an "additional insured").

After the recent wildfires out in the Los Angeles area, many insurance companies denied coverage to homeowners who had transferred their homes to their trusts, but without also having the trust designated as an additional insured on their insurance policies. As shocking as this recent development may sound, prudence dictates to not take any chances, and to discuss this matter with your homeowners' insurance agent.

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Please let us know (either via an email or by setting up an update meeting) if you would like to discuss the application of any of these recent homeowner developments to your situation further.

Thank you!