Dear Liz: I want to make sure my close friend gets my house after I die. What is better for this friend from a tax standpoint, should I add her to the deed or leave the house to her in the will?
I am afraid that I will leave it to her in the will so that a family member may try to contest the will. Although I will be leaving money to a family member in the will, I want to make sure the house goes to my friend.
The answer: If you add your friend to the work, you are giving her a home for the rest of your life. This means that if she ever sells the house, she could owe taxes on the appreciation that has occurred since you bought the house. On the other hand, if you bequeath the home to her, the gains made during your lifetime will not be taxed. You can leave the home to her through a will, living trust or, in many states, a transfer on death deed. (You can read more about this option in the next section.)
If you are concerned that someone is fighting your decision, seek appropriate legal advice. Estate planning can get complicated and most people would benefit from the help of an attorney, but this is especially true if you have disputing relatives.
Dear Liz: Having been through the probate process several times in California and Nevada, I can say it stinks. It is expensive and happens at a time when a family is most stressed and sad after losing a loved one. While estate planning and revocable trusts seem to be very popular, I’d like to recommend another route: estate transfer deeds. They are available online through the district. It avoids complicated probate, is far simpler than a living trust, and still gives the family the benefit of an increased tax basis on the estate.
The answer: Probate isn’t always a nightmare. Some states have adopted reforms that make the process cheaper and more time-consuming. Even in states with notoriously slow and expensive probate, such as California, there are usually rules that allow small estates to bypass most of the red tape.
However, due to the rising value of real estate, simply owning a home can be enough to trigger probate even when the deceased has little or no other assets. So many states now offer transfer on death options for real estate, and they can be a good solution for people who own nothing but their home.
Liz Weston, a certified financial planner, is a personal finance columnist NerdWallet. Questions can be directed to her at 3940 Laurel Canyon, ext. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.