My mother is 89 years old and has been in a nursing home almost five years. I am contributing to the cost of her care. I have two questions: How should we transfer the title of her house when she dies? I have her old will, done in the 1960s, naming me as the sole beneficiary. And can the money that I have contributed over the years be deducted from the sale of her house? This is her only asset.
Regardless of where in the Washington area your mother’s house is, on her death, administration of her estate (called probate in some states) will be required. The probate laws vary in Maryland, Virginia and the District, so this discussion is general in nature. Your mother has a will but it’s about 50 years old. Times — and the law — have significantly changed since then.
Is your mother mentally competent? If so, you might want to have a lawyer review the will to make sure that there are no legal pitfalls. Keep in mind that the lawyer’s client must be your mother — and not you. Your mother may want to make changes, such as contributions of furniture or jewelry to a favorite charity or relative. She may even want to disinherit you. Although this would be distasteful to you, it is her house and she has the absolute right to dispose of it as she wishes.
The will should name a personal representative, called “PR.” It may be you or someone else. The PR will file the will in the probate division of the court in the jurisdiction where your mother last resided before she died. Letters of administration will be issued formally appointing the PR.
Under the probate laws of Maryland and the District, upon the death of your mother, and once a PR is appointed, her property is automatically owned by the PR. In Virginia, however, title to real property vests automatically in the heirs or in the beneficiaries of the decedent’s will.
So, if the will directs that the property be given to someone other than the PR, the PR will prepare and file with the local recorder of deeds a personal representative’s deed conveying the property to that named person. In your case, however, since you are the sole beneficiary, you will merely prepare the PR deed, conveying the property to yourself.
What will happen if there are large debts owed by your mother, and the only asset is the house? If you do not have enough money to personally pay off those debts, the house may have to be sold to satisfy creditors. In Virginia, even if the property has been vested in the beneficiaries, the PR retains the authority to sell in order to pay off all creditors.
There are other legal requirements placed on the personal representative. For example, in addition to paying creditor claims, real estate taxes and keeping the home insurance current, the PR must arrange to prepare and file federal and state income tax returns, as well as estate tax returns, if required. You should consult an accountant to assist you with these filings. You can obtain the federal income and estate tax forms on line from the IRS at irs.gov.
The PR should also obtain an appraisal of the house as well as all of the personal property in the estate. This is important to determining if there are any estate tax obligations.
Finally, the personal representative is responsible for preparing a final accounting of the estate’s assets and debts. Once this is done, and the PR is satisfied that all debts have been paid and all assets have been distributed, the process is over.
You do not necessarily need a lawyer, but the process can become complicated. After a death in the family, you have more important things to do than deal with the legalities of probate. I recommend that you retain a local attorney whose practice includes estate and probate law.
Your second question can be answered easily. Since you will inherit the house, and presumably plan to sell it, all of the net sales proceeds after paying off any creditors will go to you. In effect, you will possibly get more money than you actually spent on the upkeep of the house.
Keep in mind that on your mother’s death, your basis for tax purposes is the value of the property on the date of your mother’s death. That is yet another reason why the PR should obtain an appraisal of the property.
This is known as the “stepped up” basis. Example: Your mother bought the property for $50,000, but on the date of her death it was worth $500,000. If you sell the property for $500,000, you will not have to pay any capital gains tax. However, if you sell the property for more than that amount, you may have to pay capital gains tax on the difference between the stepped-up basis of $500,000 and the actual sales price (less real estate commission and certain closing costs).
However, if you decide to live in the house and can prove that you have owned and lived in the property for two out of the five years before it is sold, you can exclude up to $250,000 of your gain from tax. If you are married and filed a joint tax return, and your spouse has also lived in the property for at least the two years, together you can exclude up to $500,000 of any profit from capital gains tax.
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. 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, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.