Q: My wife died recently. Should I have the deeds on our investment real estate and on our house changed to delete her name and substitute my son's name? I want to ensure that the properties will pass to him on my death. Is this better than including him in my will?
A: You have asked two important questions. The first is relatively easy, but the second involves a careful look at the tax laws, and at your own net worth.
We first have to determine how you and your wife held title. If it was held as "tenants by the entirety," the most common way, then on your wife's death the title was automatically transferred into your name. Lawyers refer to this as a "transfer by operation of law." You can have the deed corrected by putting it in your name, but this is not necessary.
On the other hand, if, for example, you and your wife held title as "tenants in common," on her death, her share would pass in accordance with the terms of her will. If she had no such document, then the laws of intestacy in the state where she resided would control who is to receive her share of the property. Additionally, you would have to probate her estate, which can be time-consuming and expensive.
So, first find out how you and your wife held title to your various properties. If you do not copies of the deeds, your attorney can quickly find the answer for you, or you can go to the Recorder of Deeds where the property is located.
Now, let's address your second question. On your death, you want your son to own title to your various properties. You can, of course, put him on the deed with you. But this may cause serious financial problems for him in the long run.
Let's look at this example. You and your wife purchased your primary residence many years ago for $40,000. On your wife's death, the property was worth $200,000. For tax purposes, there is a concept of the "stepped-up basis"; this means that the person who inherits property obtains as his cost basis the value of the property as of the date of death. Basis is an important tax term, since capital gains tax is based on profit--i.e., the difference between "basis" and "net selling price." You should note that basis is increased by the value of any improvements you have made to the house over the years; for investment properties, it is reduced by the amount of depreciation you have taken.
In our example, your basis on the death of your wife will be $120,000. You calculate this by taking half of the price you paid for it (i.e., $20,000) and adding half of the value of the property on the date your wife died (i.e., $100,000). If you decide to deed half of the property to your son, his basis will be half of yours--or $60,000. The general rule in tax law is that the basis of the donor becomes the basis of the donee.
Let us further suppose that on your death, the property is worth $300,000. When your son inherits your share of the property, he would be able to take advantage of the stepped-up basis for your share--i.e., $150,000--and thus his basis in the property would be $210,000 ($60,000 plus $150,000). If he sells the property immediately for $300,000, he will have made a profit of $90,000. The capital gains tax he currently would have to pay to the Internal Revenue Service would be $18,000. (For this example, I have not included any selling costs.)
However, should he inherit the house through your will, and then immediately sell the property for $300,000, he would pay no capital gains tax at all. His basis would be the stepped-up basis on the date of your death--i.e., $300,000--and his sales price would be the same. There's no gain, and no tax to pay.
This same example applies to all the properties you own, and the tax consequences of selling depreciated real estate would be more severe; the basis would be lower by virtue of all the depreciation you have taken.
This is a complex area, and I have only touched on one main issue. You must consult your tax and legal advisers before you make any irrevocable decisions.
Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.