But in such cases, the house is still fully taxable in their estate, although it is out of their probate estate since it is owned automatically on death by the kids. But such an agreement must be carefully structured using the gift tax exemption. Your wife can give an equal amount. The balance can be given January 1st of the following year. This is costly from a tax perspective because when the kids receive the house as a gift their tax basis is the same low basis the parents had.
Feelings are important.
Bruised feelings make for ruined families, or worse, lawsuits. Adopt an approach that really works, given the people involved and all the likely scenarios that could possibly occur. Choose the right executor When parents let their home pass to their estate, their executors become central to determining the disposition of the dwelling. Let the kids hash out how the home will be sold and how the proceeds will be divided. There might be a clause, similar to a business buyout agreement, setting conditions under which a child could buy the house from the estate.