Tax Benefit of Nebraska Transfer on Death Deed
The main asset of many retired couples is their home. It is common practice for the property to be jointly owned, so that in the event of the death of one of the couple, the home transfers smoothly to their spouse.
We often recommend use of a transfer on death (TOD) deed to transfer the property to the next generation upon the second death, particularly where the home is the principle asset in the estate.
Importantly, use of the TOD deed does not affect eligibility of the property for a step up in tax basis in the hands of the beneficiary.
In this connection, it is important to note that the creation of a TOD deed is not a completed gift. The owners continue to have the ability to deal with the property however they choose. They can sell or mortgage the property without the need for approval or any other involvement by the beneficiary. The owners have the ability to revoke the TOD deed at any time during their lifetime, if they so choose.
When the transfer to the beneficiary occurs at the time of the death of the owners, the beneficiary takes the property with a stepped-up basis. This is the fair market value of the property at the time of death.
For example, assume a couple purchased a property in earlier years for $125,000. They lived happily in the home and made improvements over the years. The husband, now a widower, would like to give the home to his only daughter. The current value of the property is about $250,000. A TOD deed would allow his daughter to inherit the property upon her father’s death with a tax basis equal to current value of $250,000, without the need to go through probate. If instead he had deeded the home to her during his lifetime, she would have received the property with his lower basis of $125,000. The difference would be taxed as a capital gain upon her later sale.
Couples who own a property in joint tenancy needs to be aware that the joint tenancy will take precedence over a TOD deed. Upon the first death, the joint owner will receive the title as before. The TOD designation only takes effect upon the second death.
The TOD deed will not affect the availability of the home as a resource, if it should come to pass that the owner or owners require Medicaid assistance.
Nebraska has specific requirements for preparation and recording of a TOD, that may not be apparent to the uninitiated. In addition a TOD deed is not always the solution to ones estate planning needs. In estate planning, there is no “one size fits all” solution.
For these reasons, we urge you to obtain the services of a qualified estate planning attorney to get the right plan in place to protect your loved ones.