What is needed to ensure that I inherit my aunt's home without probate or taxes?
Full Question:
Answer:
Tax consequences will depend on all the facts involved, including, among others, the value of the estate. Capital assets owned by a person when the person dies, obtain a new cost basis (called "stepped-up basis" in this case) for capital gains tax purposes. The new cost basis equals the fair market value of the owner’s interest at the date of death.
The answer will depend in part on the marital status of the parties involved. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. When either spouse dies, the total value of the community property generally becomes the basis of the entire property, even the part belonging to the surviving spouse.
For this to apply at least half the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. If an interest is left to more than one individual then the basis for each individual is the proportion left to them of the fair market value.
When the estate tax is fully repealed (which is for year 2010 only, according to current law), limits are placed on allowable stepped-up basis, presumably to keep people from taking advantage of a situation where they would pay no estate taxes and also completely avoid capital gains taxes.
Under the terms of a full estate tax repeal, only $1.3 million of inherited assets are eligible for stepped-up basis. The balance retains the carryover basis from the donor. In addition, a surviving spouse is allowed an extra $3 million in stepped-up inherited assets, bringing that total to $4.3 million. The estate's executor can decide which of the assets gets the stepped-up basis and which get the carryover basis.
Arizona allows a joint tenant to execute a beneficiary deed without approval of other joint tenants, but the beneficiary deed is effective only if the decedent survives all other joint tenants.
A beneficiary deed functions like a transfer on death deed and avoids probate. There is authority that it creates no gift during life; therefore, the real property receives a full step up in basis at death. No capital gain tax is owed. No gift tax is owed due to a transfer before death (although a federal estate tax may be owed if the estate is large enough). However, there is ambiguity surrounding the present interest created by a beneficiary deed.
The following text discussing beneficary deeds is from http://ftp.clrc.ca.gov/pub/2006/MM06-05.pdf:
"There is some indication that the estate planning bar in Arizona finds that the device fills a need:
The beneficiary deed is an ideal tool for the married couple or
person with a simple, modest-sized estate. This typically would
involve someone whose primary asset is a paid-off home. The
modest size of the estate usually does not warrant the expense of a
revocable trust. Because the equity in the home will likely exceed
$50,000, a probate proceeding would normally have to be
commenced upon the death of the owner because the $50,000
limitation for real property affidavits has been exceeded. The good
news is that the probate process can now be avoided through the
use of this new deed.
Murphy, Drafting the New Beneficiary Deed, 38 Arizona Attorney 30, 31 (June 2002)
(footnote omitted).
However, practitioners have also noted problems. One is that if the decedent
is a joint tenant, the survivor may undo the beneficiary deed.
Also, there are technical requirements for recordation. An improperly drafted
deed or one that does not conform to all of the legal requirements may create
problems that are not discovered for quite some time, when it may be too late to correct them."
The following is an AZ statute:
33-405. Beneficiary deeds; recording; definitions
A. A deed that conveys an interest in real property, including any debt
secured by a lien on real property, to a grantee beneficiary designated
by the owner and that expressly states that the deed is effective on the
death of the owner transfers the interest to the designated grantee
beneficiary effective on the death of the owner subject to all
conveyances, assignments, contracts, mortgages, deeds of trust, liens,
security pledges and other encumbrances made by the owner or to which the
owner was subject during the owner's lifetime.
B. A beneficiary deed may designate multiple grantees who take title as
joint tenants with right of survivorship, tenants in common, a husband and
wife as community property or as community property with right of
survivorship, or any other tenancy that is valid under the laws of this
state.
C. A beneficiary deed may designate a successor grantee beneficiary. If
the beneficiary deed designates a successor grantee beneficiary, the deed
shall state the condition on which the interest of the successor grantee
beneficiary would vest.
D. If real property is owned as joint tenants with the right of
survivorship or as community property with the right of survivorship, a
deed that conveys an interest in the real property to a grantee beneficiary
designated by all of the then surviving owners and that expressly states
that the deed is effective on the death of the last surviving owner
transfers the interest to the designated grantee beneficiary effective on
the death of the last surviving owner. If a beneficiary deed is executed by
fewer than all of the owners of real property owned as joint tenants with
right of survivorship or community property with right of survivorship, the
beneficiary deed is valid if the last surviving owner is one of the persons
who executes the beneficiary deed. If the last surviving owner did not
execute the beneficiary deed, the transfer shall lapse and the deed is
void. An estate in joint tenancy with right of survivorship or community
property with right of survivorship is not affected by the execution of a
beneficiary deed that is executed by fewer than all of the owners of the
real property, and the rights of a surviving joint tenant with right of
survivorship or a surviving spouse in community property with right of
survivorship shall prevail over a grantee beneficiary named in a
beneficiary deed.
E. A beneficiary deed is valid only if the deed is executed and recorded
as provided by law in the office of the county recorder of the county in
which the property is located before the death of the owner or the last
surviving owner. A beneficiary deed may be used to transfer an interest in
real property to the trustee of a trust even if the trust is revocable.
F. A beneficiary deed may be revoked at any time by the owner or, if
there is more than one owner, by any of the owners who executed the
beneficiary deed. To be effective, the revocation must be executed and
recorded as provided by law in the office of the county recorder of the
county in which the real property is located before the death of the owner
who executes the revocation. If the real property is owned as joint tenants
with right of survivorship or community property with right of survivorship
and if the revocation is not executed by all the owners, the revocation is
not effective unless executed by the last surviving owner.
G. If an owner executes and records more than one beneficiary deed
concerning the same real property, the last beneficiary deed that is
recorded before the owner's death is the effective beneficiary deed.
H. This section does not prohibit other methods of conveying property
that are permitted by law and that have the effect of postponing
enjoyment of an interest in real property until the death of the owner.
This section does not invalidate any deed otherwise effective by law to
convey title to the interests and estates provided in the deed that is
not recorded until after the death of the owner.
I. The signature, consent or agreement of or notice to a grantee
beneficiary of a beneficiary deed is not required for any purpose during
the lifetime of the owner.
J. A beneficiary deed that is executed, acknowledged and recorded in
accordance with this section is not revoked by the provisions of a will.
K. A beneficiary deed is sufficient if it complies with other applicable
laws and if it is in substantially the following form:
Beneficiary Deed
I (we) ___ (owner) hereby convey to ___ (grantee beneficiary) effective
on my (our) death the following described real property:
(Legal description)
If a grantee beneficiary predeceases the owner, the conveyance to that
grantee beneficiary shall either (choose one):
? Become null and void.
? Become part of the estate of the grantee beneficiary.
_________________________
(Signature of grantor(s))
(acknowledgment).
L. The instrument of revocation shall be sufficient if it complies with
other applicable laws and is in substantially the following form:
Revocation of Beneficiary Deed
The undersigned hereby revokes the beneficiary deed recorded on ___
(date), in docket or book ___ at page ___, or instrument number ___,
records of ___ county, Arizona.
Dated: _______________________
______________________________
Signature
(acknowledgment).
M. For the purposes of this section:
1. "Beneficiary deed" means a deed authorized under this section.
2. "Owner" means any person who executes a beneficiary deed as provided
in this section.
I am prohibited from giving legal advice, this service provides information of a general legal nature. Due to the complexities involved in estate planning, all facts and circumstances must be taken into account in determining the best method of ownership for the individuals involved. I suggest getting a second opinion from an estate planning and/or tax expert who can review all the facts and circumstances involved.
