Ask Liz Weston

Get smart with your money

Q&A

Q&A: Options for transferring condo to heirs

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Dear Liz: I would like to get advice on how to transfer my condo to my son and grandchildren. It looks like I don’t have too much living left and need to get a clear understanding of what would be better for me and for them. All the articles are very confusing. Can you advise me on what is better, transfer on death or some other form of transfer that avoids probate?

Answer: Transferring your condo while you’re still alive probably isn’t a good idea, since the property wouldn’t get the favorable step up in tax basis when you die. Without that step up, your heirs could owe capital gains taxes on the appreciation that occurred during your lifetime.

You could leave the property to your heirs in your will, but that would involve your estate going through the court process known as probate. In many states, probate isn’t a big deal. In other states, including California, probate can be lengthy, expensive and worth avoiding.

A living trust is often the best way to transfer an estate to heirs without probate, although the cost can be significant — $2,000 or more.

If the condo is your only asset, a transfer-on-death deed may be a simpler, cheaper way to get the property to your heirs. Many states now offer this option, and you can often find the form by searching “transfer on death deed” and the name of your state. Your county clerk’s office may have downloadable forms as well. You’ll typically need to get the form notarized and then file it with the county property records office for the deed to be effective.

Q&A: Social Security inflation adjustments

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Dear Liz: When the Social Security Administration makes its cost of living adjustments, do these increases get factored into the benefit amounts for people who are not yet collecting their Social Security?

Answer: Social Security’s inflation adjustments are factored into your retirement benefits starting at age 62, whether or not you’re actually collecting checks. So there’s no reason to speed up an application just to lock in a cost of living adjustment.

Q&A: To shred or not to shred

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Dear Liz: In a recent column, an attorney suggested that a veteran’s information can be shredded three years after death. However, surviving spouses of veterans can be eligible for benefits to cover the costs of assisted living and would need to provide that information.

Answer: That’s an excellent point. Many people aren’t aware of the “aid and attendance” benefit that can help veterans and their spouses pay for help with activities of daily living, including bathing, dressing and using the bathroom. These custodial care costs are typically not covered by Medicare.

Q&A: California is a community property state. How that affects your and your spouse’s need for a will

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Dear Liz: Does a spouse automatically inherit everything if the other passes away without a will?

Answer: Not necessarily.

Anything that has a beneficiary designation, such as retirement accounts and life insurance, would typically pass to the person named as beneficiary even if that’s not the surviving spouse. Bank and investment accounts also may have “transfer on death” or “pay on death” beneficiaries. In many states, cars and even homes can be passed with beneficiary designations. In addition, jointly owned assets would pass to the other owner.

Other assets would pass to the deceased spouse’s survivors according to state law if there is no will or living trust. You can look up those laws by searching for the state’s name and the words “intestate succession.” If there are no children, the surviving spouse may inherit everything or may have to share with the deceased’s parents or siblings. If there are children, the surviving spouse inherits a portion of the estate with the children getting the remainder.

For example, in California — a community property state — the spouse would inherit all the community property and one half of the separate property if there is one child, and the child would inherit the rest. With two or more children, the spouse gets all of the community property and one-third of the separate property, with the children sharing the rest.

Q&A: Retirement benefits and taxes

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Dear Liz: We are just getting to the age where mandatory distributions from our retirement accounts have to start. We don’t need the additional cash as we have great pensions. If we convert to Roth IRAs, will the amount in the Roth be subject to minimum deductions going forward? Will our heir have to pay any taxes on the money in the Roth account when inherited? Can we count the amount converted to the Roth account against the mandatory required distribution? I do understand that all the money will be taxed as income when coming out of the retirement accounts.

Answer: Required minimum distributions and Roth conversions have to be separate transactions. Conversions can’t count against your RMDs, and you’re not allowed to put an RMD into a Roth.

Any money you convert to a Roth would, however, reduce future RMDs, since Roths aren’t subject to mandatory distributions. Your heirs wouldn’t pay taxes on inherited Roth accounts, either, although they would be required to drain those accounts within 10 years.

Plus, you’re increasing your pool of tax-free money. This could be especially helpful for whichever of you survives the other, because after the year of death, the survivor probably won’t be able to file as “married filing jointly” anymore and would be subject to less favorable single taxpayer status.

Consult a tax pro, however. Roth conversions can push you into a higher tax bracket and increase your Medicare premiums. A “laddered” approach, or a series of partial Roth conversions over several years, may be advisable.

Q&A: Paying a grandchild’s student loans

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Dear Liz: Regarding the grandparent who would like to pay off a grandchild’s student loans.

You wrote that paying off the loans would be considered a gift. However, if the grandparent paid the funds to the institution that originated the student loan, would it then not be a gift? This would exempt the grandparent from filing the gift tax return.

Answer: You may be thinking of the unlimited exception for a family member’s medical expenses or education. Unfortunately, payments made to a student lender aren’t included in this exception.

Normally, any gift that’s larger than the annual gift exclusion limit — which is currently $17,000 per recipient — would require filing a gift tax return. Gift taxes aren’t due, however, until the amount given away over the annual limits exceeds the lifetime gift and estate exemption limit (which is currently $12.92 million). Clearly, someone has to be quite wealthy, and quite generous, before gift taxes are a concern.

But even the necessity to file a gift tax return can be avoided for larger gifts if you’re paying someone else’s education or medical expenses. The unlimited exception for these expenses, however, applies only to tuition payments made directly to the educational institution and payments for medical care made directly to a healthcare provider. Payments to other parties, such as lenders or insurance companies, aren’t included in this exception.