Ask Liz Weston

Get smart with your money

Inheritance

Q&A: Property transfers trigger tax problem

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Dear Liz: I’m considering giving property (a condo) to my child through a quitclaim deed while I am still living. If she continues to live in the condo for two years after gaining possession, doesn’t she get a $250,000 capital gains exemption when she sells the property?

Answer: Yes, if she owns and lives in the home for at least two of the previous five years, she can exclude up to $250,000 of home sale profits from her income. However, her taxable gain would be based on your tax basis in the property: basically what you paid for the home, plus any qualifying improvements. Only if she inherits the home would the tax basis be updated to reflect its fair market value on the date of your death. Although taxes should never be the sole consideration for property transfers, the favorable step-up in basis may be a powerful incentive to hold off. Consider discussing your options with a tax pro.

Q&A: How this heir can head off challenges to her mother’s estate

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Dear Liz: My mother and her second husband have been married for over 25 years. They are both in their 60s. I am her only child. Mother has created a will in which I am the sole beneficiary. She owns three properties, two of which are here in California and one is abroad. Do I have any reason to be concerned that my mother’s wishes would be challenged by her second husband or my father, who also lives in California, whom she divorced over 33 years ago?

Answer: Anyone can challenge an estate plan. That doesn’t mean they will be successful. A long-divorced spouse, for example, probably wouldn’t have much standing to dispute a will.

A current spouse, however, could overturn the bequests if the properties were purchased during the marriage because California is a community property state.

That means assets acquired during marriage are generally considered jointly owned. Even if the properties were acquired before the marriage, the current spouse could successfully challenge the will if he contributed to a property — by helping to pay the mortgage, for example.

The chances of a successful challenge are greater if your mother is trying to do her own estate planning, rather than seeking expert advice. The fact that she’s created a will, rather than a living trust — which avoids probate and which is typically advisable in California — is concerning. In addition, bequeathing property abroad can be complicated, to say the least.

Your mother would be smart to consult an experienced estate planning attorney who can assess her situation and offer recommendations on the best way to structure her estate plan. You can help her find someone by asking friends and financial professionals for recommendations. If she’s balking at the cost, offer to pay the bill if you can. You’ll probably avoid future hassles and costs, so it should be a sound investment.

Q&A: How gifting property before you die gives your kids a tax headache

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Dear Liz: My wife and I have purchased a few properties over the years and now we would like to give these properties to our children. I’ve read that the best way to gift properties is to wait until we pass away, which sounds terrible. Is there any way to transfer or gift properties without paying a huge amount of taxes?

Answer: Yes, although you’d likely be shifting the tax bill to your kids.

Currently you have to give away over $13 million in your lifetime to owe gift taxes. But if you transfer the properties to your children during your lifetime, they will also get your tax basis in the properties.

That means if they sell, they’ll owe taxes on the appreciation that’s occurred since you bought the real estate. If you bequeath the properties at your death, by contrast, the properties get an updated value for tax purposes and the appreciation that occurred during your lifetime isn’t taxed.

Gifting the properties may still be the right choice, but consider talking to an estate planning attorney and a tax pro before proceeding.

Q&A: Protecting a daughter’s inheritance

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Dear Liz: We need help knowing what to do regarding leaving our home and money to my unmarried daughter. She has had a boyfriend for over 15 years. How can we protect her inheritance so he can’t claim half?

Answer: Inheritances are considered separate property. So her inheritance could be considered hers alone even if your daughter marries this guy and lives in a community property state where other income and assets accumulated during the marriage would be considered joint property.

She might have to be careful not to commingle funds, however. A partner who contributes toward a mortgage on a house might have a claim on the property, for example.

Please talk to an estate planning attorney who can assess the situation and give you — and your daughter — personalized advice.

Q&A: Transferring a house to heirs

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Dear Liz: We are updating our estate plan to account for the transferral of our home to our six children when we die. The home currently has a large mortgage balance on it. We would prefer that it not have to go through probate, and that any outstanding mortgage balance would not be immediately due. I know there are various options for the transferral, all with pros and cons. Do you have any recommended best practices for our situation?

Answer: Yes. Discuss the situation with an experienced estate planning attorney, who can give you personalized advice. Estate planning can get complicated fast, and expert guidance is typically worth the cost.

Your attorney probably will suggest creating a living trust to avoid probate, the court process for settling an estate. Another way to avoid probate in many states is a transfer-on-death deed. The deed can be a solution for smaller estates, but the trust allows you to transfer other assets in addition to your home, provides for the administration of your estate and helps you plan for incapacity, as well.

You probably don’t need to worry about your lender immediately calling in your loan. Your mortgage may include a clause that technically makes the full balance due if the home is sold or transferred. While the estate is being settled, though, inheritors typically are protected from these clauses by state and federal law as long as payments continue to be made. Your attorney can provide more details on the protections in your state.

With a living trust, your successor trustee will be able to access other funds in the trust to make the payments while the estate is being settled, said Jennifer Sawday, an estate planning attorney in Long Beach. With a transfer-on-death deed, the heirs would be responsible for making the payments.

Inheritors often can assume a mortgage, but having six people own one house would be unwieldy, at best. Most probably, the best solution would be to have the estate continue to make the mortgage payments until the home is sold.

Q&A: A capital gains surprise

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Dear Liz: My son has decided to settle abroad and wants to purchase a home. I made a gift of stock valued at $17,000, which had significant gains. My broker indicated that giving him the stock would avoid capital gains on my part, and he could cash the stock in at that value, also without accruing capital gains. Our CPA is now telling him that he will, indeed, have to pay the capital gains. What’s the real scoop?

Answer: It shouldn’t be a scoop that the person who does taxes for a living gave you the correct answer.

When you gave your son the stock, you also gave him your tax basis — essentially, what you paid for the stock. Once the stock was sold, your son owed taxes on those gains.