Property transfer upon death made simple

DEAR BOB: When I die, I want to leave my house to one of my sisters. But I wish to avoid probate costs and delays. Rather than spend the money on a living trust, which you often recommend, I want to fill out a quit claim deed and sign my house over to my sister. However, she won’t learn of this until my death (I will keep a copy with my will, which I will give to a trusted brother). Will my sister still be able to record my quit claim deed years from now (after my death) or is there a statute of limitation? She is an attorney and very bright – Gloria Z.

DEAR GLORIA: You earn an “A” for creative thinking. But you receive an “F” for your idea because it is illegal. The reason is a valid deed must be unconditionally delivered during the grantor’s lifetime.

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Your preparing a quit claim deed and keeping it with your will means you have not delivered the deed to the grantee unconditionally during your lifetime. The legal result is that quit claim deed to your sister will be worthless after you die.

If you want to save your sister the cost and delay of probate of your house, a revocable living trust is your best alternative. While you are alive, you can manage your living trust assets as you do now, even selling your house if you wish.

Equally important, if you become incompetent, such as with Alzheimer’s disease, your successor trustee can then manage your living trust assets for your benefit.

The cost of a living trust, usually less than $1,000 unless your situation is complicated, will make your sister thank you. More details are in my special report, “Pros and Cons of Revocable Living Trusts to Avoid Probate Costs and Delays for Your Heirs,” is available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.

ATTORNEY PROVIDES VALUABLE GIFT TAX INFORMATION

DEAR BOB: As an attorney who has done a considerable amount of real estate and tax work, I always enjoy your informative and accurate articles. However, I think you recently goofed. A few weeks ago you told a reader the federal estate and gift tax exemption was raised for 2004 to $1.5 million. That’s not quite correct. Although the federal estate tax exemption was raised to $1.5 million, the lifetime gift tax exemption remained at $1 million – Theodore H. Nebel, Esq.

DEAR THEODORE: You are 100 percent correct. Shame on me for presuming the federal gift tax exemption increased at the same time the estate tax exemption increased for 2004. After that item ran in papers nationwide, I even heard from an IRS representative who very politely pointed out my oversight.

Just to be crystal clear, the federal estate tax exemption increased to $1.5 million for decedents who die in 2004. But the federal gift tax exemption remained at $1 million. For more details, please consult your tax adviser.

DOES FILING INCOME TAXES DETERMINE PRINCIPAL RESIDENCE?

DEAR BOB: Thank you for your excellent explanation of the recent Guinan tax case involving the sale of a principal residence and IRS denial of the $500,000 tax exemption because the sellers didn’t file income taxes from the home they sold. My wife and I have a similar situation where we own two homes where we spend about equal time each year. Both homes meet the Internal Revenue Code 121 test of two-out-of-last-five-years occupancy. Would your advice be to file income taxes from the home we plan to sell? – Drake W.

DEAR DRAKE: Yes. The Guinan case (2003-1 USTC 50475) is the only court decision, so far, interpreting the very important Internal Revenue Code 121 $250,000 principal residence sale exemption (up to $500,000 for a married couple filing jointly).

This important U.S. District Court decision determined the sellers of a luxury Wisconsin home, although they met the two-out-of-last-five-years ownership and occupancy tests, really didn’t sell their principal residence because they filed their income taxes from their Arizona home.

Just between us, the Guinan case was a fluke. It occurred because the Guinans reported their home sale on Schedule D of their income tax returns, paid a $40,000 capital gain tax, and then filed an IRS 1040X refund claim, which was rejected. So they sued for their $40,000 tax refund. Naturally, the IRS fought the refund claim very hard.

Filing your income tax returns from the home you expect to sell is not a hard and fast rule. But it is just one more indication the home you sold was really your principal residence. Be sure to consult your tax adviser for full details.

CAN TIMESHARE OWNER JUST WALK AWAY?

DEAR BOB: For 11 years now, I’ve owned a timeshare in Cancun, Mexico. I have been trying to sell it with several timeshare sales companies, and, as you recommended recently, on Ebay. No luck for the last two years. If I just “walk away” from it and stop paying the fees, would that be detrimental to my credit history. I own it outright, except for the annual maintenance fee – Mark G.

DEAR MARK: If you still owed money to the timeshare developer or a bank, you could be sure that firm would report your default to the credit bureaus. That is the only “hammer” they have over timeshare owners like you who are fed up and just want to walk away to get out of monthly payments.

But your situation is a bit different because you own your timeshare free and clear. Unless the homeowner’s association that manages your timeshare complex is tied into the U.S. credit bureaus to report maintenance fee defaults, you probably won’t have any adverse consequences because, legally, that is not a granting of credit.

HOW CAN HEIRS GET BROTHER’S WIDOW OUT OF THE HOUSE?

DEAR BOB: My mother passed away 17 years ago and left a life estate in her house to my brother. The approximately 1-acre parcel, with a three-bedroom house, was to be divided three ways between my brother, a nephew and myself. Last year, my brother passed away. But his widow is still living in the house. The will stated a life estate only for my brother. Where do we stand? – Ken J.

DEAR KEN: Please consult a local real estate attorney. It’s time for your brother’s widow to move on. She has no legal right to remain on the property. If you want to sell the property and divide the sales proceeds, the polite thing to do is offer the property to the widow if she wants to buy it. Otherwise, it’s time to sell the property and divide the sales proceeds among the heirs.

CAN CO-OWNER FORCE THE SALE OF A CONDO?

DEAR BOB: In 1984 I invested as a 50 percent owner in a small condominium mixed-use property. My 50 percent partner and I own a second floor residential unit, which is rented month-to-month. There were no papers drawn at the time to define when our partnership would be dissolved. Fortunately, our investment is located across the street from a new development. In my opinion, after 20 years of ownership, this is an opportune time to sell. But my partner refuses to sell. Can he hold me hostage? – Harvey L.

DEAR HARVEY: Although you didn’t state how the title is held, let me take a wild guess and presume it is tenants in common. In most jurisdictions, a tenant in common can force a sale of the property by bringing a partition lawsuit in court.

Unless your co-owner can produce a compelling reason not to sell the condo, the court will probably order a partition sale with the proceeds divided equally. For full details, please consult a local real estate attorney.

CAN NEW-HOME BUYER INSIST ON A PROFESSIONAL INSPECTION?

DEAR BOB: I avidly read your articles every weekend, but now I have a question. As a new-home buyer, can I insist on having a professional inspection before closing the purchase of my new home? Should I use the builder’s Realtor to handle the details since I live 130 miles away from the new-home development? – Sylvia T.

DEAR SYLVIA: Congratulations on remembering that buyers of brand new homes also need professional inspections before closing their purchases. I recommend you hire a local home inspector who belongs to the American Society of Home Inspectors (ASHI). They are the toughest and best qualified inspectors. You can find them at www.ashi.com.

The new Robert Bruss special report, “Today’s Five Best Real Estate Profit Opportunities,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.