Dear Liz: I want to make sure a close friend of mine gets my house after I pass away. Which is better tax-wise for this friend, adding her to my deed or leaving the house to her in my will?
My fear of leaving it to her in my will is that a family member may try to contest the will. While I will leave my family member money in my will, I want to make sure that the house goes to my friend.
Answer: If you add your friend to the deed, you’re making a gift of the home to her during your lifetime. That means if she ever sells the house, she could owe taxes on the appreciation that happened since you purchased the home. If you bequeath the home to her, on the other hand, the gains that occur during your lifetime won’t be taxed. You can leave her the home via a will, a living trust or, in many states, a transfer-on-death deed. (You can read more about this option in the next section.)
If you’re concerned about someone fighting your decision, please get appropriate legal advice. Estate planning can get complicated, and most people would benefit from an attorney’s help, but that’s especially true if you have contentious relatives.
Dear Liz: Having been through the probate process several times in California and Nevada, I can say it stinks. It’s expensive and occurs at a time when family is most stressed and saddened after having lost a loved one. Although estate planning and revocable trusts seem to be all the rage, I’d like to recommend another path: transfer-on-death deeds for real estate. They are available online via the county. It avoids a complicated probate, is far simpler than a living trust and still gives the family the benefit of a stepped-up tax basis on the property.
Answer: Probate isn’t always a nightmare. Some states have adopted reforms that make the process less expensive and protracted. Even in states with notoriously slow and expensive probate, such as California, there are typically rules that allow small estates to bypass most of the red tape.
Because of the rising value of real estate, however, simply owning a home can be enough to trigger probate even when the deceased has few or no other assets. Thus, many states now offer the option of transfer-on-death deeds for real estate, and they can be a good solution for people who don’t own much other than a home.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
Read More:Liz Weston: I want to leave my home to a friend when I die. What’s the best way?