Ask Liz Weston

Get smart with your money

Estate planning

Q&A: When an inherited house gets sold, it pays to know the tax rules

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Dear Liz: My sister and I inherited a house from our mom in 2003. Back then, it was appraised at close to $500,000. It’s now worth $1.3 million and we want to sell and split the profits. My sister has lived in the house since Mom passed. Approximately what would the tax liability be?

Answer: You’ll determine the potentially taxable profit by subtracting the tax basis — the amount the house was appraised for at your mother’s death, plus any qualifying improvements — from the sale proceeds. Your sister can exempt $250,000 of her share of the profits, since she has owned and lived in the house for two of the previous five years. If her share of the profit was $400,000, for example, she would owe long-term capital gains taxes on $150,000 of that.

As a non-occupant, you wouldn’t have the option to exempt any of the profit, so you would owe long-term capital gains taxes on your entire $400,000 share. Long-term capital gains rates depend on your income, but the federal rate is 15% for most.

Q&A: My parents cut my kid out of their will. (Ouch!) Can I give her some cash?

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Dear Liz: My parents wrote my youngest daughter out of their will (my other children were left in). As both parents are now gone, I am in the process of settling the estate. I feel horrible that my parents did this. My daughter is very upset with me and her siblings for not sharing the inheritance. I am under the impression that there is nothing we can do about the will. Having said that, I would like to give my daughter a good amount of money but I believe I can’t give more than $18,000 a year. Am I correct in my two assumptions?

Answer: Yes and no.

Yes, as the executor of the estate, you’re bound to carry out your parents’ wishes as expressed in their estate planning documents.

But no, there’s no limit to how much money you can give someone. Gifts over a certain size — which is $18,000 this year — have to be reported to the IRS. But you won’t owe gift taxes until the amounts you give away over the annual limit exceed your lifetime limit, which is currently $13.61 million.

That said, a large enough gift could have an impact on your own estate. Consider getting advice from your estate planning attorney before you proceed.

Q&A: My ex-wife lent my money to her boss. What can I do?

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Dear Liz: I recently found out that my ex lent one of her former bosses $2,500 to get his brother out of jail on bond. My ex took the money out of a joint account that I had opened with the inheritance I got when my dad died. It’s now been four years and I haven’t received a penny of the loan back. I could really use the money now as I have medical bills to pay. Question is who do I go after? My ex or the boss?

Answer: You may have read in this column that inheritances can be kept as separate property, even in community property states where other assets acquired during marriage are generally considered jointly owned.

An inheritance can lose its status as separate property, however, if it’s commingled with joint funds. That’s what you did when you opened a joint account with the money: You gave your ex access to the funds.

You certainly can ask the ex and the boss to give the money back. You could try small claims court if that doesn’t work. You also could hire an attorney, but the costs of trying to get the loan repaid may well exceed the amount at stake.

Q&A: How do I find an estate planning attorney I can afford?

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Dear Liz: The question from the couple who wanted to leave a home to their four children hit home with me. I’m in the same boat but with only two kids. How do I go about finding an estate planning attorney that I can trust and also afford?

Answer: Start by asking for recommendations from friends, family and any financial professionals you trust. If you already have a CPA, for example, chances are they can refer you to a good estate planning attorney in your area. Consider interviewing a few candidates to make sure they handle situations similar to yours.

If you’re trying to keep costs down, consider the attorney’s overhead. Fancy buildings in expensive areas may impress, but you can find competent attorneys in less ornate offices, perhaps in suburbs or smaller towns, who charge less.

Q&A: The ins and outs of what counts for probate

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Dear Liz: The value of our car, furniture and personal items is well below the $185,000 that currently triggers probate in California. We no longer own real estate. Am I correct that investment and bank accounts that have designated beneficiaries do not count toward the probate limit?

Answer: Yes. (Your car doesn’t count either, by the way.)

Most states have simplified procedures for smaller estates. California’s limit, which is raised with inflation every three years, was set at $184,500 on April 1, 2022. What’s counted for probate purposes depends on state law, and California excludes cars, boats and mobile homes, as well as bank accounts owned by multiple people, property that transfers directly to a spouse and real estate outside California.

Other property that avoids probate includes life insurance proceeds, death benefits and accounts that have named beneficiaries. Real estate can avoid probate if it’s held in joint tenancy or is transferred using a transfer-on-death deed. Property in a living trust also avoids probate.

Q&A: Are living trusts a DIY project?

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Dear Liz: I have a living trust. I’ve also got family who have become estranged and priorities that have changed in terms of charities I’d like to benefit. Is there any way to set up a trust that allows me to make these changes without having to pay an attorney?

Answer: There are certainly do-it-yourself options for estate planning. But if you can afford to pay for expert help, why wouldn’t you? Estate planning is complicated, and the cost of making a mistake can be significant. That’s especially true if there are disgruntled family members who could challenge your estate plan.

The good news is that updating a living trust typically costs a lot less than setting it up in the first place. As mentioned in previous columns, you should consider having an attorney review your trust about every five years, and after major life changes.