Real Estate Matters: Homeowner considers removing wife from living trust, adding her to title
Q: I am 76 and my wife is 58. I own our home outright, and she will inherit the house when I die through a living trust. Is it to her advantage to maintain the situation the way it is from a capital gains perspective, or should I add her to the deed now? I am thinking of the step-up in valuation of the house when she inherits it to minimize her capital gains tax if/when she sells the house.
A: It sounds like you have an estate plan. Which is a good thing. It sounds like you hired an attorney to create a living trust for you to hold your home and other assets.
We’re just not sure why you’d want to change the setup at this time. Especially, if you were married at the time you set up the living trust. We’d be interested in knowing what has changed since then to make you think otherwise.
We suspect that you’ve owned your home for some time — perhaps even before you were married. You didn’t provide any reason why you would want to put your wife’s name on the title to the home. So, let’s unpack some of the options and opportunities.
Under current federal tax law, when you die your wife will get the home at a stepped-up basis. This means that if you purchased the home for $100,000 and it’s worth $1 million on the day of your death, your wife will inherit the home at that valuation.
If your wife turns around and sells the home around the time of your death, typically within a year, she’d pay no federal taxes on the sale of the home. That’s because she inherited the property and sold the property at the same value of one million dollars.
Is this your primary residence? The Internal Revenue Service allows homeowners to sell their primary home and exclude up to $250,000 of profit from federal income taxes. Of course, there are rules you must follow: You must have lived in the home for two out of the last five years, and you can only use that exclusion once every 24 months. Married couples can exclude $500,000 in profit from federal income tax.
So if you purchased the home for $100,000, and the home is now worth $250,000, and you decide to sell today, you’d be able to exclude that profit from federal income tax.
Are you thinking about what happens after you die? Perhaps you imagine that by placing your wife on the title to the home today, she’d automatically become the owner of your home upon your death without paying an attorney to go through probate. You could be right, but you might still need to hire someone to prepare the deed now to put your wife on title to the home. The fee you pay now could be about the same as what she’d pay later.
Unless you have a clear understanding of why you might want to add your wife to title, you might discuss this issue with the estate attorney who helped prepare your living trust. Remember, there are pros and cons to every decision and you’ll want to examine all the options before you decide to move forward.
(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, a financial wellness technology company. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)
©2023 Ilyce R. Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency, LLC.