Real Estate

Legal Briefs: What is a transfer-on-death deed?

Legal Briefs: What is a transfer-on-death deed?

Most people are familiar with deeds. Though they come in many different varieties, deeds convey (transfer) interests in real estate. Generally speaking, a conveyance is effective as soon as a deed is signed. With a transfer-on-death deed, however, the conveyance is effective only after the grantor (the person conveying the real estate) dies.

What are the benefits of a transfer-on-death deed?

The main benefit of a transfer-on-death deed is that the conveyance can avoid probate. Let's say Joe wants to leave his house to his son, Dan. If Joe provides in his Will that the house should go to Dan, the Will must still go through probate before Dan can get the house. But if Joe signs a transfer-on-death deed, all Dan will need to do is file an affidavit (and a death certificate) with the county clerk to obtain title to the house.

What is stepped-up basis?

What is stepped-up basis?

"Stepped-up basis" refers to a tax rule that minimizes or eliminates capital gains tax liability. Say, for example, your Uncle Buck owns Apple stock. He purchased 100 shares of the stock when it was worth $1/share. In tax lingo, his cost to buy the stock is known as his "basis." Apple stock is now worth about $170/share. If Uncle Buck sold his shares today, he would have to pay a capital gains tax on the $169/share appreciation in the value of his stock. Similarly, if Uncle Buck gifted you the stocks today, you would "inherit" his basis, meaning you would have to pay capital gains tax on the $169/share appreciation if you sold the stock tomorrow.

But let's say Uncle Buck decided to hold onto his shares. He placed them in a trust that names you as the sole beneficiary. If Uncle Buck died today, leaving you the stocks, the Internal Revenue Code provides that the value of the stock today (Uncle Buck's date of death) is your new basis in the stock. In other words, your basis is "stepped-up" from $1/share to $170/share. So if you turned around and sold the Apple stock for $170/share, you would pay no capital gains tax.