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Q&A: Should I get a home appraisal when my spouse dies?

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Dear Liz: When one spouse dies, the couple’s primary residence gets a step-up value to the current market value (in California). So how is that value established for future reference? Is it necessary to get a formal appraisal or are current sales comparisons sufficient? Also, is that step-up value the basis for any future home sale or would the sale have to happen in a certain time frame?

Answer: It’s a good idea to get a formal appraisal after a spouse dies to establish the home’s value and potentially reduce future taxes. There’s no deadline for using this new tax basis, but surviving spouses who sell within two years of the death can get the full $500,000 capital gains exclusion available for couples. After the two-year mark, survivors would be limited to the individual $250,000 limit.

Here’s a quick primer on how step-up works. In every state, the deceased spouse’s half of jointly owned property gets a new value for tax purposes. This step-up in tax basis means that no capital gains taxes will be owed on the appreciation that happened during the deceased spouse’s ownership, at least on 50% of the property.

In community property states, both halves of the property typically get this valuable step-up in basis at the first spouse’s death. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

If an appraisal wasn’t ordered soon after a death, getting a formal valuation can be somewhat more complicated. Your estate planning attorney may be able to guide you to appraisers experienced in retrospective valuations.

Q&A: Should I get Medicare supplemental insurance?

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Dear Liz: I’m about to retire and have decided on original Medicare with a Medigap policy rather than Medicare Advantage. Can a Medigap company cancel your medical plan, and can they deny a medical procedure? Are there extra charges for preexisting conditions or other coverage issues?

Answer: Medigap is another name for Medicare supplement insurance. This coverage is provided by private insurers to help pay out-of-pocket costs such as deductibles, co-payments and co-insurance for treatments approved by Medicare.

If you apply for a Medicare supplemental policy during your initial enrollment period, you have something known as “guaranteed issue rights.” The insurer offering the policy can’t deny coverage or charge you extra for preexisting conditions. If Medicare approves a treatment or procedure, the supplemental coverage applies — the insurer can’t independently decide to deny you.

If you miss that initial enrollment period, however, you may be subject to medical underwriting. An insurer can charge you more, impose waiting periods or refuse to issue you a policy.

Your initial enrollment period typically starts when you turn 65 and sign up for Part B, the part of Medicare that covers doctors’ visits. If you delay Part B because you have employer-provided health insurance, then the six-month open enrollment period will start after you sign up for Part B. (You have eight months after your employer coverage ends to enroll in Part B without penalty.)

An insurer can cancel a Medigap policy only if you stop paying your premiums, you provide false information on your application or the insurer becomes insolvent. If you lose your coverage through no fault of your own, you would have guaranteed issue rights to buy a Medigap policy from another insurer.

Q&A: Is it better to have a fee-only financial advisor?

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Dear Liz: As a certified financial planner for the past 31 years who has never run afoul of any regulatory body, I cringe every time I hear you recommend people seek out only fee-only financial planners!

While we certainly do fee-based work where appropriate, sometimes it is simply better for the consumer if their advisor receives a commission not a fee. As an example, assuming all other factors being equal, if a client were to maintain an account for 10 years with a fee-only advisor charging 1% per year, wouldn’t the client pay considerably more in fees than if they placed their portfolio in a commission-based account where the advisor were to receive a one-time 5% fee?

I certainly understand conflicts can arise, but don’t they do so in most aspects in life? And isn’t this really just a matter of ethics? Can’t a fee-only advisor lack ethics just like an advisor who receives commissions?

Answer: The most important differential among advisors is whether they’re fiduciaries and therefore obliged to put their clients’ best interests first. As a certified financial planner, you’re held to a fiduciary standard and must disclose any potential conflicts of interest to your clients.

Most advisors are held to a lower “suitability” standard. That means the advisor can recommend investments that pay higher commissions, even if those investments aren’t the best option for their clients.

Fee-only financial planners typically are fiduciaries and have opted for a compensation arrangement that avoids the conflicts of interest inherent with commission-based recommendations. These planners are paid only by the fees they charge their clients, which can be hourly rates, project fees, retainers or a percentage of assets under management.

Q&A: Does my spouse get half of everything in a divorce?

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Dear Liz: My wife recently asked for a divorce, which was difficult to hear. That said, I want to move forward with my life and part of this is being on sound economic footing. I have been the primary earner in our marriage for most of our 12 years together, even though my wife was capable of working full time. Since we live in California, does she get 50% of everything, including money I had prior to our marriage? And if I originally put in only one-third of the down payment on our house, am I only eligible for one-third of the appreciation, or do I get half?

Answer: Even in community property states such as California, assets acquired before marriage are typically considered separate property. Assets acquired during the marriage, however, are generally split 50/50. If you can trace your down payment back to your separate property, you may be able to get a reimbursement for that amount before the remaining equity is split between you. Your attorney can offer further guidance.