For many couples in retirement, their main asset is their home. Frequently the property is jointly owned and the property smoothly transfers to a wife at the death of her husband or vice versa.
But what is the best way to transfer the property to the next generation? In many cases, especially in smaller estates a beneficiary (transfer on death) deed can solve many problems. In a previous post, we explained how these deeds work. Here, we will discuss how the manner of transfer can affect taxes.
First, it is important to note that a beneficiary deed is not a completed gift. The owner continues to have the ability to do what he or she wants with the property and has the power to revoke the deed.
When a transfer occurs at death through the beneficiary deed, the heir takes the property with a stepped-up basis. This is the fair market value of the property at the death.
An example is helpful. Assume a couple purchased a property in the 80s for $125,000. They enjoy the neighborhood and made improvements over the years. The husband, now a widower, would like to give the home to his only daughter. The current value of the property is about $400,000. A beneficiary deed would allow his daughter to inherit the property with the higher basis. Deeding it to her during his lifetime would mean she receives the property with the lower basis and a later sale could incur capital gains tax.
Joint owners and Medicaid
Several words of warning need to be added about beneficiary deeds. First, a couple who owns a property in joint tenancy needs to be careful. Joint tenancy takes precedence over a beneficiary deed and renders it ineffective.
Another disadvantage is that a beneficiary deed can affect Medicaid benefit eligibility. If a long stay in a skilled nursing facility is required, property might need to be sold off to pay for those expenses.
Because each family has unique needs and goals, seek the review of an estate planning attorney to get the right plan in place that will protect loved ones.