Q: I enjoyed reading your recent article on the differences between using a will and a quitclaim deed in order to pass property to heirs or family members.
I’m writing to ask about my 91-year-old mother who still lives in her home. She has her will set up and has appointed me and my sister as her power of attorney during her lifetime and the executors of her estate after she dies.
Her house is still in her name. She was unsure for many years whether to transfer title to all three of her children, and she now wonders if she should do that while still living in the home. My sister and I have no interest in keeping the home after she is gone, but my brother, who lives with her, may have an interest in buying it down the road.
I’m assuming that if we leave things alone, the estate will go into probate. Or if we discuss this with her while she is alive, she can decide whether to transfer the home to us and we can then work out the details later among each other. Is it better to transfer the title of the home to us, or to leave it as it is given her age and go through probate?
Mom has her affairs in order. But I’ve said to her that it is her money and she needs to do what she feels comfortable doing; so, if she wants to transfer ownership now, she should.
A: You are correct: If you do nothing, your mother’s estate will need to be probated. To probate an estate means that after the death of a loved one, you go to probate court and open up a case in the name of the deceased loved one. Once the case is opened, the court can appoint a representative to act on behalf of the estate. This representative is almost always the executor of the will. With that appointment comes some powers that enable the executor to sell the assets in the estate, close accounts, withdraw money from accounts and deal with the IRS and the Social Security Administration.
It sounds simple, and it can be, but the process of drawing up the paperwork and going to court can be daunting for most non-attorneys. This is where probate attorneys come in. The probate attorney will handle the paperwork before the court, attend any court hearings and eventually deliver a final accounting to the probate court when all of the assets have been disposed of and the executor’s job to handle any other affairs of the deceased is over.
Probate attorneys often get a bad name because depending where you live, they can charge quite a lot for the services they render. In your situation, your mom’s entire estate could be her home, her bank accounts and any other stocks or bonds that she might own in her own name. Unless your mom has titled all other documents in her estate jointly with her kids, we suspect that you might have to deal with something more than just the home down the line.
You can do some research now on probate processes and costs in your area and talk to a few attorneys about the work your mother has already put in and what will be included in her estate. You can also get some recommendations on what your mother should do now, if anything. It’s possible that the attorneys will tell you to keep everything the way it is because the estimated costs to settle the estate will be reasonable.
If, on the other hand, you find out that the costs of probate are likely to be high, you can make other decisions now. For one, you can make sure all your mom’s assets, other than the home, are held jointly so that when she dies, they pass automatically to the surviving owner. You can also set up a trust, and title all of her assets in the trust, so they will pass automatically to the beneficiaries.
As far as the home is concerned, you have various options and decisions to make. If the home has appreciated substantially over the years, you might want to keep the home in her estate to minimize any taxes you might have to pay when you sell it.
Let’s say she has a profit of $250,000 if she were to sell the home today. Under current tax laws, she can exclude from tax up to $250,000 in profits from the sale of the home. (This exclusion is for the sale of a primary residence that the owner has lived in for two out of the last five years.)
Now, if she signs a quitclaim deed for the home to her kids today, the IRS will look at this as a gift to the three of you. Her cost basis in the property (what she paid for the home plus any material or structural improvements she has made over time) will be transferred to you. But, when you go to sell the property, you wouldn’t benefit from the $250,000 exclusion. This means that you and your siblings may have to pay federal income or capital gains taxes on the sale of the home (and this may also increase the state tax you pay, depending on where you live).
On the other hand, if the home is still in her estate when she dies, you and your siblings will inherit the home at the stepped-up basis. This means the home’s value (for estate tax purposes) will rise to the current market value at the time of her death (as opposed to what she paid for it), so if you turn around and sell it immediately, there wouldn’t be any profit and you wouldn’t have any taxes to pay.
One final thought: In some states, you can use a transfer on death deed that would allow the property to transfer automatically to the kids upon her death. You and your siblings would inherit the property at the stepped-up value.
Trusts and transfer on death deeds will cost you something to set up. The question for the estate attorneys is this: How does that cost compare to the estimated cost to probate her estate? If it’s going to cost you $2,500 to set up a trust or prepare a different deed, and $10,000 to probate her estate, then you should pay for the trust or deed now.
Here’s your plan of action: Take a 30,000-foot view of your mom’s assets, talk to estate and tax experts, talk with your brother about whether he will ultimately want to buy or live in the home, and then share your findings with your mom. She sounds sharp and will want to make sure that the work she has already put in to prepare her estate satisfies everyone.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)