Real estate inheritors learn value of living trusts

Time-consuming probate court raises costs, invites capital gains tax
By: Robert J. Bruss: Inman News
DEAR BOB: After our mother died in August 2003, my brother and I inherited her assets, which consisted mainly of her house plus stocks and bonds. Her will left everything to us equally. But the estate had to go through probate court proceedings. We just received title to her home recently and listed the house for sale with a local Realtor. Meanwhile, the house was vacant, costing us upkeep expenses. The only good thing resulting from the probate court delay is the house appreciated about $100,000 in market value. However, our probate attorney now tells us we will owe capital gain tax because our "stepped-up basis" was determined on the date of our mother's death. Why isn't there a law against this probate rip-off? – Cindy R.

DEAR CINDY: If you are a regular reader, you know I constantly admonish readers to arrange a revocable living trust to avoid probate costs and delays for their heirs.

Obviously, your mother didn't follow that advice. As a result, you and your brother suffered through two years of unnecessary probate court delays and costs.

I especially relate to your situation because I encountered an 18-month delay in Minnesota probate court after my mother died several years ago. Her Minnesota attorney erroneously told her not to put her condominium title into her living trust (which would have avoided probate).

When she died, the condo title had to go through probate. Most states have similar probate court costs and delays.

The only good thing about probating your mother's house was it rose in market value during the two-year delay. But the bad result is that appreciation in market value is taxed as a capital gain.

HOW LONG IS HOME BUILDER LIABLE FOR DEFECTS?

DEAR BOB: In July 2002 we bought a brand-new townhouse. We had it professionally inspected and everything appeared in good condition. But in August 2004, the slab foundation cracked. We noticed a bulge under the carpet in our living room. Immediately, we notified the builder. He said we had a one-year warranty and the concrete slab bulged or cracked after that so we are out of luck. Is this true? – Bruce N.

DEAR BRUCE: The laws of most states require home builders to warrant their homes for longer than one year. You didn't report where the townhouse is located.

I suggest you consult a local real estate attorney to determine your legal rights against that home builder. In some states, such as California, the home builder is liable up to 10 years for construction defects.

BEWARE OF A $1 QUIT CLAIM DEED

DEAR BOB: On my way driving to work every day I go by a run-down abandoned house. I have observed it for at least a year. One day I stopped to jot down the address, walk around it, and ask the neighbors. They said a "strange old lady" owned the house. I researched the title and learned the property taxes hadn't been paid for some time. I finally located a man who claims to be the old lady's son. He said the property is in bad shape and he could give me a quit claim deed for $1 since he inherited the house after his mother died. Should I get involved, knowing the house needs work? – Norman O.

DEAR NORMAN: For $1 it's hard to go wrong, unless there are recorded liabilities against the property. Before you accept that $1 quit claim deed, please consult a local title insurance company to learn if the son's quit claim deed is insurable.

If you can buy an owner's title insurance policy for that house, you may have discovered a super bargain. However, if the title insurer tells you there are lots of unpaid liens against the property, or perhaps the son doesn't really own the property, maybe you should pass on that opportunity.

Please be aware a quit claim deed conveys only whatever title the grantor owns. If that son doesn't own the property, his quit claim deed is worthless.

The new Robert Bruss special report, "How to Earn Up to $250,000 (or more) Tax-Free Profits Every 24 Months Buying and Selling Houses," is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.