Ask Liz Weston

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real estate

Q&A: They want to give the caretaker the house she lives in without imposing a tax burden

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Dear Liz: Our family owns a vacation home. A caretaker for the property lives in a smaller house next door that is also owned by our family. We consider her part of our extended family and would like to show our appreciation when the property is sold. Our wish would be to give the smaller house in which she lives to her as a gift, but we know the annual payment of property taxes would probably be too great a financial burden for her to live there as a retiree. (She is currently in her 50s.) Is there some sort of trust or fund we could set up that would cover her property taxes until her death without adding to her taxable income?

Answer: Yes, but there may be a better solution.

A trust can be set up to pay the property taxes or other property expenses during the caretaker’s lifetime, said Jennifer Sawday, an estate planning attorney in Long Beach. Trusts face high tax rates, however, and cost money to set up and administer. Plus, you have to find people willing to be trustees and backup trustees who are likely to outlive the caretaker. You also must decide what happens to the money when the caretaker passes away.

All these issues are surmountable, of course. Younger members of your family could be trustees, for example, or you could hire professional trustees. The money could be invested conservatively, or in tax-efficient mutual funds, to minimize taxes. Or it could be invested aggressively enough to pay the tax bill and still provide enough income to pay the property expenses.

Another, simpler solution would be to give her the cash outright. Gifts are not taxable to the receiver, so the gift itself would not increase her income taxes. She would have the burden of managing the cash, of course. Like the trust, she could invest to minimize taxes or more aggressively to potentially grow the money and offset inflation. Either way, her tax rates probably would be lower than the trust’s.

An estate planning attorney can help your family discuss the various options and set up the documents to carry out your wishes.

Wednesday’s need-to-know money news

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Today’s top story: 7 Halloween headaches and how insurance can help. Also in the news: Your battle plan for buying a home with a VA loan, what college and student debt changes are likely after the election, and the best credit card for food delivery apps.

7 Halloween Headaches and How Insurance Can Help
What to do when you get tricked.

Your Battle Plan for Buying a Home With a VA Loan
Choose experienced professionals to guide you through the VA loan process, and bring some cash to the table, even if you don’t plan to make a down payment.

Trump vs. Biden: What College and Student Debt Changes Are Likely
What to expect from both candidates.

The Best Credit Cards for Food Delivery Apps
Finding tasty discounts.

Q&A: A look at property title

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Dear Liz: You’ve mentioned that in community property states, a couple’s primary residence gets a full step-up in tax basis when one spouse dies. Does this require that the title to the property specify that it is community property? My husband and I purchased our home about 6 weeks before we were married, so we hold title as joint tenants with rights of survivorship. Should we get the title changed?

Answer: The answer is probably yes, said Mark Luscombe, principal analyst for Wolters Kluwer.

The title to your home does not have to specify that it is community property for it to be treated as community property, Luscome said. If you live in a community property state and are married, the property you acquire and the income you earn during the marriage are generally considered community property regardless of how you hold title. However, property acquired before the marriage would not generally be treated as community property, he said.

The title to your home does not have to specify that it is community property for it to be treated as community property, Luscome said. If you live in a community property state and are married, the property you acquire and the income you earn during the marriage are generally considered community property regardless of how you hold title. However, property acquired before the marriage would not generally be treated as community property, he said.

Each way of holding title has its advantages. Joint tenancy with right of survivorship avoids probate and offers protection from creditors. Community property offers the tax advantage you mentioned: The whole property gets a new basis for tax purposes at the first spouse’s death. That means all the appreciation that occurred before the first death is never taxed. In non-community property states, only the deceased partner’s half gets that new value. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is an “opt-in” community property state.

Some community property states offer the best of both worlds by allowing real estate to be titled as community property with right of survivorship. Those states include Alaska, Arizona, California, Idaho, Nevada and Wisconsin, according to self-help site Nolo.

Q&A: What to consider when deciding whether to buy or rent a home

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Dear Liz: I’m just turning 70 and am on my own for the first time in my life. In the last three years I took care of both my 100-year-old mother and my husband as their health failed. My daughter and son-in-law live in Colorado and are going to have a baby, and I plan on moving there in the near future.

I had originally planned to move into a senior living apartment complex. Then my children said I should buy a condo for the freedom, privacy and potential investment. They found a condo building under construction with units I could afford, plus a mortgage company willing to take me on and help with the down payment.

I’m torn about what to do. Because of both bad luck and bad decisions, currently I have only about $18,000 in savings. Between my pension and Social Security I make about $47,000 a year.

Do I invest in the condo and use up a good chunk of my savings? It’s on the second floor (the steps aren’t very steep, fortunately) and I’m strong and in good shape, but I’m also 70 and things can go south quickly. But, as the kids have said, I could live there for 10 years and make a good profit from the sale.

Or do I move into the senior living apartment and keep my savings but face regular increases in rent (thus “throwing my money away”)? The senior complex has amenities and activities and elevators but lots of people around all the time (thus sacrificing some privacy). Having a place of my own would be so wonderful, but I need to be smart about this decision.

Answer: Younger people often don’t understand about stairs. No, they’re not a big deal now, but even a few steps can become a huge barrier if you have mobility issues — and those issues become more likely the older you get. Having an elevator or a unit on the ground floor, preferably with a zero-step entry, is a good insurance policy against the vicissitudes of aging.

Besides, you aren’t necessarily throwing money away when you rent. You’re buying freedom. You don’t have to worry about paying for repairs and other unpredictable costs, and you can move more easily if your circumstances change. People are often advised to rent first when they move to a new area, just so they can get a better idea of the advantages and disadvantages of various neighborhoods before they commit. Renting also could give you a chance to build up your reserves so that if you do decide to buy, you won’t be quite so
house poor.

Having more people around isn’t necessarily a bad thing, either. You’re newly widowed, and moving to an area where you presumably don’t know many people. The senior complex could make it a lot easier to make friends. A good social network is essential to staying mentally and physically healthy as we age.

Wednesday’s need-to-know money news

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Today’s top story: Are you saving money in the right place? Also in the news: Why it’s time to dump home buyer love letters, can you be denied life insurance for smoking weed, and 5 fresh kitchen backsplash ideas.

Are You Saving Money in the Right Place?
What to consider when you’re stashing your savings.

Why It’s Time to Dump Home Buyer Love Letters

Can You Be Denied Life Insurance for Smoking Weed?
You might have to shop around.

5 Fresh Kitchen Backsplash Ideas
A stylish and functional backsplash can breathe new life into your kitchen.

Beware high-risk homes that drive up insurance

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When house hunting, the price of homeowners insurance probably isn’t top of mind. But homes with hidden risks can make getting coverage difficult, expensive or both. Learning how to identify them could save you a bundle.

This could be a particularly important concern for first-time homebuyers and those moving from cities to suburban or rural areas who may not be aware of common hazards, says Jennifer Naughton, risk consulting officer for North America for Chubb, an insurance company.

In my latest for the Associated Press, learn how to identify high-risk homes.