The Big Move: Do I need to put my wife’s name on my house? Doesn’t she automatically inherit it when I die?

Sincerely,

Planning ahead

‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.

Dear Planning,

I must first commend you on investigating these issues now rather than putting them off. As we’ve seen from high-profile cases, such as the deaths of Aretha Franklin and Chadwick Boseman, when people forgo estate planning, it’s their heirs who are left to clean up the mess. That can lead to in-fighting among family members, hurt feelings and financial losses — just ask my colleague, The Moneyist.

To your question, it would be great if matters of inheritance were so simple. But your wife getting to keep the home isn’t a foregone conclusion here.

In community property states like California, generally any property that a married couple receives while together is automatically transferred in full to one spouse after the other’s death. Most married couples buy their homes together. A 2020 report from home financing company Haus found that only around 38% of homes were owned by single people — and that’s actually a record.

Maybe you have a friend who was widowed, and she got to keep the house without much trouble. Perhaps she even avoided probate altogether as far as the home she shared with her husband was concerned. But that’s probably because she and her husband bought their home together, making it community property.

By your own admission, you owned the house you now share with your wife before you even met her. So in California’s eyes, it will be separate — not community — property. Who inherits the home will therefore depend on your other potential heirs. Do you have a daughter, brother, niece, parent or cousin? If so, then they could have a claim to the property. If not, then it should go to your wife.

Consider the home in your will

One way to avoid any family squabbling and confusion is to draw up a will that clearly delineates your wish that your wife inherit the home upon your passing. But in this case, the will would need to go through probate, which could be a drawn out and stressful process.

Another option, as you hinted, is to add your wife to the home’s deed. This would make her a joint tenant of the home, granting her the right to take full possession of the property after you die. Doing this isn’t without potential drawbacks or complications, though.

If you have a mortgage on the home, you may need your lender’s approval before amending the title. Do you know if your wife has a significant amount of outstanding debt? If so, creditors could put a lien on the home after her name is added for the amount she owes. Your wife would also need to revise her own estate planning if the home is put into her name.

From a tax perspective, there are capital gains considerations. Currently, when an heir inherits a home, they receive it on a stepped-up basis. So when they go to sell the home, the property’s original value for the purposes of calculating the capital gains on the sale is the date they inherited the property, and not when it was originally purchased, which typically reduces the amount of taxes they owe.

Adding your 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 you originally purchased it.

Another consideration: Adding your wife to the deed technically would be considered a gift, equivalent to 50% of the property’s market value. This would exceed the annual exclusion limit for gifts (which is $15,000 as of 2020), but it would fall well short of the lifetime exemption limit (currently over $11 million). So you would need to file a gift tax return, also known as a Form 709, but you shouldn’t face much in the way of a tax liability.

And it goes without saying if the two of you were to divorce, the house would become another item to haggle over if your wife’s name is added to the deed.

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.

My advice to you: Talk to an attorney who specializes in estate planning to craft the best possible plan for you and your spouse, so that all of your interests are considered and respected.