Weird estate planning

We live in Maryland. My father died awhile ago. My mother just sold the marital home. At that time we found out that in 1994 (if that matters) my father changed the deed to be in my mothers name only. We know he did that for “the purpose of estate planning.” The current result is that my mother owns much more in capital gains taxes than she would have if it had been in both names. I have looked and looked and cannot come up with any reason that this would have been valuable for estate planning purposes. Now I am worried that the planner did other weird stuff but before I get upset is there any viable reason at all for this to have been done in 1994? At that time the mortgage was paid in full. At no time was the estate worth more than 1,000,000 including the house.

Wow. Crickets. There’s usually a few estate lawyers/tax accountants who chime in with answers to these types of questions. I don’t know the answer but I’m curious to find out what it is.

I’m not certain, but I wonder if putting the house in mom’s name was not for tax purposes, but for probate purposes.

As in, if dad knows he’s going to kick it first, go ahead and give everything he owns to mom before he dies, so nothing has to go through the will since he ‘owns’ nothing and she already ‘owns’ everything.

IANAL. I can see a good reason right away. Your Dad wanted to make sure your Mom held clear title in the event of his death. No probate issues or anything from preventing her from keeping the place or living there afterward. I personally think that was a great move on your Dad’s part. But given that she may have predeceased him, it could have been tricky for him if that had occurred. Bully for your Dad.

Agree - it was more likely to avoid probate and inheritance taxes/other issues.

Another trick is to form a corporation (these are special case corps - see lawyer) and place all assets in the corporate name.
One shareholder’s death is no where near as messy as an owner’s death.

Legal advice is best suited for IMHO.

General Questions Moderator

She can exclude the first $250,000 of GAIN , so as to reduce the income.

What is her reported gain ?
Is it the sale price minus the value at 1994, due to the change in title ? (maybe capital gain tax was paid then. )

Is it the sale price minus the couples original purchase price ?

So really Did the 1994 transfer actually reduce the “Gain” ? By allowing him to claim his $250,000 exclusion ???

Avoiding probate and making sure Mom held clear title as of his death makes no sense. Holding title as “Joint Tenants with Right of Survivorship” would accomplish exactly the same thing. As a matter of fact, passing the entire title to the wife complicates things if the wife should happen to die first. (It happens.)

Federal estate taxes as an explanation also makes no sense. There is an unlimited spousal exemption, so no federal estate tax would have been due.

Capital gains tax makes no sense. At the husband’s death, she would get a step-up in basis on the husband’s half of the house, except in community property states, where she would get a step-up on the value of the whole house. (Maryland is not a community property state.) So, by transferring the house before death, they lost out on the step-up.

Maybe if the husband had some sort of debts or legal problems or if they wanted to do possible nursing-home asset planning, it could make sense (Again, they run the risk that the wife will have some legal problems or go into a nursing home first.) Or maybe if they had wills that left their assets to separate groups of individuals and they wanted to split up assets fairly between them, then it might make sense.

If they owned the property jointly at death in a non-community property state, add half the FMV at death plus half the purchase price, and subtract the sum from the sale price. In a community property state, just use the FMV at death.

One other thing, if they were anticipating that the wife would die first, transferring the house to her name would get a step-up on the entire value of the house.

All in all Alley Dweller got it all covered.

As to *why *Dad did it: Most likely he was clueless about all the legal realities and thought he was doing a smart thing by making stuff simpler. All he ‘knew’ was “Probate bad; avoid.” A little bit of folk ‘wisdom’ is a dangerous thing.

In 1994 the unified credit was 600k. What this meant was that both your Mom and Dad could each pass on 600k without paying federal estate taxes. Anything over that would be taxed, starting at 55% iirc.

Most husband and wives had a will that basically said “Honey I love you, and if I die you get everything, and vice Versa.”

The effect of this on a million dollar estate would have been this in 1994:

Husband and wife have a total estate worth 1mm. Husband dies and wife inherits 500k. She pays no taxes due to the unlimited spousal exemption (spouses inherit freely without federal taxation.

Later the wife dies. 600k passes to heirs without estate taxes. 400k gets taxed, and there is a 220k estate tax.

To avoid this estate planners in the 90s would recommend something called a unified credit bypass trust. During their life spouses separate assets so they each have 500k or so in their individual names (in our 1 million dollar example.)

If the husband dies first, instead of his wife inheriting the money it goes into a trust. The wife can draw all the interest or principle off the trust to maintain herself by going to the trustee (usually a child or a corporate trustee.). When she dies her 500k passes without estate taxes. The 500k in the trust also passes without estate taxes. Net savings of 220k by retitling assets and updating the will. Good estate plannin, circa 1994.

The law has changed though and the current unified credit exemption for 2017 is 5.49mm. So, unless spouses jointly have a net worth that is expected to exceed that amount at the time of the second death a simple will is all that is needed.

What happened to your parents sounds like a common mistake. They got good estate planning, but they failed to update it as the laws changed. Generally speaking you should review and update wills, estate plans, powers of attorney, medical directives and such at least every five years. More often if circumstances or laws change.

Hope that helps.