For a family whose 91-year-old mother lives in her home, has a will and has appointed two sisters as Power of Attorney and executors of her estate, the question of handling the transfer of the home is explored in a recent article from the Herald Tribune, “Transfer title now or go through probate in the future?”
The family wasn’t sure if it made more sense to transfer the title to her two daughters and son while she was still living, or let the children handle the transfer as part of the estate. The brother may wish to purchase the home after the mother passes, as he lives with his mother.
If nothing is done, the house will be part of the probated estate. A case will have to be opened, a representative will be appointed by the court (usually the executor of the will) and then the executor can sell assets in the estate, close accounts and deal with the IRS and the Social Security Administration. The probate process can be time-consuming and expensive, depending on where the mother lives.
There are a number of steps that could be taken to simplify things. The mom’s assets can be held jointly, so they pass to the surviving owner, or a trust can be created, and her assets be titled to the trust, so they pass automatically to beneficiaries.
The issue of the house becomes a little more complicated because there are so many options. If the house has appreciated significantly over the years, keeping it in the estate will minimize taxes that have to be paid if and when it is sold.
For example, let’s say the house has increased in value by $250,000. Under current tax law, the mother can exclude up to $250,000 in profits from the sale of the home. This is the exclusion before the sale of a primary residence where the owner has lived in the home for two out of the last five years.
If she signs a quitclaim deed now to give the home to her three children, the IRS will consider this a gift to the three children. Her cost basis in the property (what she paid for the home, plus the cost of any material or structural improvements) will be transferred to the children. However, when the children go to sell the property, they won’t have that same $250,000 exclusion. The three siblings will have to pay federal income or capital gains tax on the same of the home.
However, if the home remains in the mother’s estate when she passes, the siblings inherit the home at the stepped-up basis. In other words, the value of the house (for estate tax purposes) will rise to the current market value at the time of her death, and not the value when she paid for the house. If the children decide to sell the house immediately, there won’t be any profit and there won’t be any taxes.
Depending on the state’s laws, the children might be able to use a transfer on death deed that would let the property transfer automatically to heirs upon the mother’s death. The siblings then inherit the property at the stepped-up value.
Here’s another question to consider: how does the cost of setting up trusts and transfer on death deeds compare to the estimated cost of probating the estate?
This family, and others in the same situation, should speak with an estate planning attorney to evaluate their options. The siblings in this case need to clarify whether their brother wants to buy the house and if he is able to do so. The mom then needs to make a decision, while she is still able to do so, because after all, it’s still her home.
One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation. Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: Herald-Tribune (Nov. 7, 2020) “Transfer title now or go through probate in the future?”