Spring has sprung, which means many homeowners are kicking off remodeling projects. It’s the time of year when homeowners are motivated to undertake various projects to enhance their homes’ efficiency, infuse their living spaces with their unique touch, and address overdue maintenance tasks. In fact, the National Association of Home Builders (NAHB) celebrates May as National Home Remodeling Month. After a remodeling project is finished, it’s essential to discuss it with an attorney so they can update the estate plan accordingly.
Home Improvement Estate Planning Considerations
For most people, their home is the largest purchase they will ever make. Equity represents the portion of the property that the homeowner truly owns after subtracting the mortgage. It grows over time as the property appreciates and the homeowner reduces their mortgage balance through payments. Equity holds significance as a valuable financial asset, generating wealth through the appreciation of the property. Therefore, the home is prominent in most estate plans. For this reason, remodeling can necessitate changes to the estate plan.
Remodeling a Home in a Trust
To avoid probate, a homeowner can put their home in a revocable living trust. The trust then becomes the legal owner of the property. When renovating or updating their home, many people turn to home equity loans, which allow homeowners to borrow funds using the equity as collateral. However, many lenders will only extend home equity loans to a person, not a trust. For this reason, the property is often taken out of the trust during the home renovation process. Importantly, the home can be returned to the trust before the loan is repaid. Ensuring that the home is properly transferred back to the trust is critical to avoid probate.
Increasing a Home’s Value
Home improvement projects typically increase the value of a home. This change in value may affect the homeowner’s estate plan, requiring that it be modified. For instance, if a homeowner was planning to leave the property to a specific person but has other beneficiaries they would like to treat equally, the estate plan will need to be reconfigured as the home, left to one heir, will be worth more than it had been.
Balancing Homeowner Needs & Legacy
Most senior adults want to grow old in their homes. Rather than move to assisted living facilities, the general preference is to age in place. A house may require renovations to accommodate an older adult. However, these renovations could entail taking out a loan. If this debt outlives the homeowner, it must be paid during the estate or trust administration process, which can impact estate planning goals.
Revisiting the Estate Plan
Homeowners must review their estate plan once the home remodeling project is completed. Conveniently, Americans tend to renovate their homes every three to five years, about the same time that attorneys recommend an estate plan review. Contact our office to discuss revisions to your estate plan. Having a Law & Stein estate planning attorney by your side brings you peace of mind.