My Mother-in-law Wants to Deed Her House to My Husband -- What Could Go Wrong?

Dear Moneyologist,

My husband and I have been married for over five years and have a son together. We grew up in somewhat different environments, although we share some similarities. We both had stay-at-home mothers with fathers who brought home the bacon. My family's bacon was middle class, needs-met, and his was upper class, needs-always-exceeded and over indulged. Both of our fathers passed away before we met and left behind our mothers in very different financial situations. My mother had to get a job and his mother has lived off of monies left behind (and some wealthy boyfriends).

When my husband and his mother talk about money they always disagree and it causes arguments. He may say, "We are going to remodel a bathroom," and she will instantly ask how much and, no matter what the answer, she scolds him for his spending habits, which are our joint decisions. She's spending too fast and will eventually run out of money. She is 60 and hasn't had a job since she was 25. Also it's important to mention my husband made a few wrong steps with finances 10 years ago and she helped him out and she can't let it go. We are both employed and take no assistance from the government or relatives. We are self-sufficient with only a car and mortgage loan for debt.

So here is my question: She recently mentioned that she wants to put her house in his name. She has a will and left everything to him (there are no other kids). She said something about it helping us when she passes away as it will help avoid paperwork. I immediately had red flags go up. If she somehow can't pay the mortgage, that would fall on us. She doesn't appear to be in need of money. She lives in a nice house and always has nice clothes. But neither of us knows how much money she has left and since she still isn't old enough for widow's Social Security, she has no income. Is there any real benefit to having her house in my husband's name when she passes away?


Dear DIL,

We've been on a roll here at the Moneyologist with mother-in-law questions. They tend to come in waves. Before that, it was stepmothers, disgruntled children and controlling parents.

With your letter, I am picking up a lot of antipathy towards your mother-in-law. Let's look at the evidence: The over-use of the word "she.' (As my own mother would say, "Who's she? The cat's mother?") The fact that your mother-in-law has lived off money her husband left behind and, as you say, "some wealthy boyfriends." (I don't care what socio-demographic group she's from, they are tough words.) You say your mother-in-law hasn't worked since 1981. (Look at it this way: She is from a different generation. It's hard to get back into the workforce once you've taken so much time out, and raising a child is a full-time job in itself.) She may not be perfect, but she's the only mother your husband's got.

That said, your red flags are right on the money. Assets inherited by your husband are passed on through a " step-up in basis" or are valued at the current value, not the purchase price, says Blake Harris, an attorney at Mile High Estate Planning in Denver. If your mother-in-law put your husband's name on the deed, he would incur capital gains tax, Harris says. If the house was sold for $1 million, even though it was originally purchased for $500,000, he would have to pay capital gains tax on $500,000.

However, he would not have to pay capital gains if he sold it after inheriting the house at her death. And if he sold the house a few years after your mother-in-law died and it was then worth $1.1 million, he would only pay capital gains on that $100,000 difference.

Another way to avoid probate: Your mother-in-law could create a revocable living trust and transfer her home into that. Your husband would not have to pay capital gains tax after she dies. "Probate is the court process for distributing a loved one's property after they pass away and typically takes one to two years and costs a few thousand dollars," Harris adds. "Creating an estate plan that avoids probate is a gift to the beneficiaries." (Harris advises consulting an attorney in case there would be any impact on your mother-in-law's long-term care insurance and whether she might need to go on Medicaid in the future to help pay for her assisted living or nursing home.)

Bottom line: It appears your mother-in-law is trying to help you and, contrary to previous letters, she is not cutting anyone out of her will or stealing money from her son. But she could be helping him even more. Explain the tax advantages of keeping the home in her name, and explore other possibilities like a trust. Mothers-in-law get a bad rap. Take a deep breath, put aside your resentments about the fights with your husband (you are never going to change her) and your belief that she is a lady of leisure. Instead, ask her what you can do to help her. It might help your relationship and provide a shift in the way you think of her.