“Til Debt Do Us Part’ Is Extravagant Couple’s Vow

Question: I’m getting married in November. I make about $50,000 a year and my fiancee makes about $20,000. We are saving vigorously for the wedding because it will be costing us and her parents about $35,000, including the honeymoon. We are on target to afford it, so no worries there. However, we will be maxing out our credit cards and we are hoping that the wedding gift money will pay off as much as 75% of the credit card debt. Any leftover debt can be paid off within a year, tops. Unfortunately, her car is really a wreck, and I fear for her safety. My question is: Should we get her a new car now or wait until after the wedding?

Answer: By the time this column appears, you probably will have bought the car. You’re not the kind of folks who defer gratification very well.

But here goes anyway.

First of all, you are not on target to afford your wedding. You’re going into debt and expecting your guests to help bail you out. Maybe they will, maybe they won’t. In many circles, gifts of cash are seen as a bit gauche, so you may not rake in as much as you expect.

Maxing out your credit cards to pay for anything is a fool’s game. It damages your credit, usually results in higher interest rates and leaves you vulnerable to any financial setback that comes along.

Remember, if you have to pay for something with a credit card and can’t pay off the bill at the end of the month, then you can’t afford it. There are a few exceptions to this rule, but a wedding isn’t one of them. And a wedding with costs that represent half your income is simply insane.

So is the idea of buying a new car when you’re shelling out money and going into debt at such a pace. If her car truly is not drivable, then buying a used car, preferably with cash, would be a better option. At the very least she, not you, should be buying the car. There’s no reason to take on joint debt until you’re legally married.

You included in your e-mail a long explanation of why you couldn’t possibly ask your future bride to scale back her expectations. Unless you two get on the same page financially, though, you’re dooming yourself to a lifetime of debt, stress and unreasonable demands. A wise woman realizes it’s stupid to start married life in a deep financial hole and is willing to help craft a celebration that matches the available resources.

Adding a Child to a Deed Can Be Tricky

Q: You recently responded to a question from someone whose mother had added him to the deed of a home. You said that the home would get a full step-up in basis for tax purposes when the mother died. I showed your column to an estate planning lawyer, and he said your reply should say that the house would not receive the stepped-up cost basis at the mother’s death, but that the child would inherit the mother’s cost basis. I hope your answer is the correct one, because the difference could mean thousands of dollars in taxes. Can you confirm which amount is the correct cost basis for capital gains taxes?

A: A lot of smart people get this one wrong, but it’s a little scary that an estate planner would.

What’s tricky is that adding a child to a deed qualifies as a gift for gift tax purposes but does not prevent a home from being included in a parent’s estate, said Bruno Graziano, estate tax expert for CCH Inc., a tax research firm.

Normally, when you make a gift, the money or asset moves out of your estate and into the estate of the recipient. If the gift is large enough (more than $11,000 this year), you’re required to file a gift tax return. If your lifetime gifts total more than $1 million, you’re required to pay gift tax on the excess.

You make a gift when you add a child to the deed of a home as a joint tenant, as well. But instead of moving a portion of the home out of the parent’s estate, it stays in, and the IRS includes the entire value of the property in the parent’s estate when he or she dies, Graziano said.

Because the entire home is included in the estate for tax purposes, the whole thing gets a step-up in tax basis. For example, if the mother paid $20,000 for the home and it was worth $100,000 at her death, the child who was included as a joint tenant would have to pay capital gains taxes only if the house sold for more than $100,000.

The exception is if the child helped pay for the home or paid the parent to be added to the deed. Then it’s not really a gift, and a portion of the home could be kept out of the estate. That’s usually not the case, however.

In the unlikely event that gift tax was paid on the original transfer, the estate would receive a credit to offset some of the estate tax that might be owed.

Any good estate-planning book talks about the rule of contribution or the Internal Revenue code section that requires a joint-tenancy asset be included in the estate unless the survivor can prove that he or she contributed to its purchase. Probably the easiest-to-understand treatment of this principle is included in “Plan Your Estate” by Denis Clifford and Cora Jordan (Nolo Press, 2002). You might pick up a copy for your friend.

Liz Pulliam Weston is a contributor to The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at asklizweston@hotmail .com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at www.latimes.com/moneytalk.