Here is a recent scenario that a client presented to me. I think this is a very typical situation that many blended families don’t consider.
My client built a house in 1995, got married to his wife in 1999. My client did not even know his future wife when he built his home in 1995. He asked me if he needs to put his wife’s name on my house. His question to me was, “when I die, doesn’t she automatically get the house since she is my spouse?” and “since my house is presently valued at $350,000.00, are there any tax consequences that I should be aware of?”
As it currently is, his wife getting to keep the home isn’t a foregone conclusion.
In community property states like Texas, if there are no children from outside the marriage, then generally, any property that a married couple receives while together is usually automatically transferred to the surviving spouse after the other’s death.
Maybe you have a widowed friend, and she got to keep the house without much trouble, and perhaps she even avoided probate altogether as far as the home she shared with her husband was concerned. But that’s likely because she and her husband bought their home together, making it community property, and all the children were from the marriage.
But, in this scenario, my client owned the home before sharing it as a residence with his now wife. So, according to Texas law, the house will be separate - not community - property. Who inherits the home would therefore depend on other potential heirs? If my client had a child (biological or adopted), brother, niece, parent, or cousin, they could claim the property. If not, then it should go to his wife.
One way to avoid any family squabbling and confusion is for my client to establish a Will that delineates his wish that his wife inherits the home upon his passing. In this case, the Will would need to go through probate, which could be a drawn-out and stressful process.
Another option, which my client mentioned, was to add his wife to the home’s deed, which would make her a joint tenant of the home, granting her the right to take full possession of the property after my client dies. Doing this isn’t without potential drawbacks or complications, though.
If my client had a mortgage on the home, he might need his lender’s approval before amending the title, and if his wife has a significant amount of outstanding debt, then creditors could put a lien on the home for the amount she owes. His wife will also need to revise her own Will if the home is put into her name. And, if the two of them were to divorce, the house would become another item to haggle over if the wife’s name was added to the deed.
From a tax perspective, there are capital gains considerations. Currently, when an heir inherits a home, they receive it on a stepped-up basis. Meaning that when they sell the home, the property’s original value to calculate the capital gains on the sale is the date they inherited the property, not when it was originally purchased, which typically reduces the amount of taxes they owe.
Adding my client’s wife to the deed would eliminate the step-up basis opportunity, meaning that if she sold it, she would owe tax on the capital gains based on when my client originally purchased it.
Another consideration of adding my client’s wife to the deed, is that it would technically be considered a gift. This gift is equivalent to 50% of the property’s market value. Since the house is valued at $350,000, then 50% is $175,000. This amount far exceeds the annual exclusion limit for gifts (which is $15,000 as of 2021), but it would fall short of the lifetime exemption limit (currently over $11 million). So, my client would need to file a gift tax return, also known as Form 709, but he should not face much tax liability.
Other ways of avoiding probate are a little more complicated, including establishing a revocable living trust to own the property or creating a transfer on death deed.
It was a smart decision for my client to consult with me about this issue. We were able to craft the best possible plan for him and his spouse, while making sure that his interests were considered and respected.
Paul B. Owens is an attorney practicing in the areas of Probate and Estate Planning law. He serves in a number of other capacities, including on the Board of Directors for the CASA Helotes Senior Center in Helotes Texas. He can be reached at his office in Helotes at 210-695-5110 or at www.PaulOwensLaw.com