Tag Archives: estate tax

Can the Executor Give Away Estate Assets?

historic houseDear Liza: My husband is the sole executor (and only child) of his mother’s Will.  There are no other beneficiaries listed in her Will.  The only asset she had was a home which is valued at about $300,000.  Does he need to probate her Will?  As the executor can he sell the home to one of our children for $1.00? Whether or not your husband has to probate the Will depends upon your state’s small estates limit. In most states, an estate that falls below a certain threshold doesn’t have to go through a formal probate. To find out about your state’s small estate limit, click here. But my guess, is yes, a piece of real property that’s worth $300,000 doesn’t fall below that limit in any state that I can think of.

Whether or not your husband can sell the house for a dollar raises a different issue. The short answer is “No.” Your husband, as the executor, has to follow the terms of the Will (as does the probate court). So, at the end of the probate proceeding, the Court will distribute that house to your husband, since you’ve said that he’s the beneficiary under the Will. At that point, if he wants to sell it for 1$ to your kids, he can do so, BUT, the IRS will consider that a gift of the fair market value of the house, minus that one dollar. Essentially, your husband is giving the house to your kids, and pretending that he sold it to them, right? The IRS gets that, they’ve seen it before.

I’d advise your husband to consult with an estate planning attorney. Depending upon the terms of the Will and the time that’s passed since his mother died, he may be able to disclaim the gift and have it pass directly to your children, as a gift from their grandmother directly. A disclaimer is a legal no-thank-you that must be properly executed within nine months of the date of death and before a person has accepted any benefit from that gift. The house would pass to your children only if the Will says that, if your husband died first, it would then pass to his issue. (Not all Wills would say that, so this depends on what it says.)

If he can’t disclaim, he’s absolutely free to make such a gift himself. He’ll have to file a gift tax return by April of the following year, reporting the gift, but he won’t owe any gift tax on the gift because your husband, like all of us, currently has the ability to give up to $5.34 million during life or at death without paying any gift or estate tax.  The gift of $299,999 will use up that much of his available exemption, leaving him with a bit over $5 million more to use.

You also need to find out whether or not your state imposes an inheritance or estate tax. You’ve told me that you live in Pennsylvania, which does impose such a tax. Click here for a general guide to state inheritance and estate taxes, including Pennsylvania.

How the Estate Tax Works

Dear Liza: My dad just received about $200,000 in cash from his recently passed-away friend’s trust.  I wonder how he should file his tax for 2012?  I found several documents discussing about inheritance tax exemption being $5 million.  Does that only apply to family members and spouses? I love getting questions with clear answers! Your father’s inherited gift from his generous friend does not affect his income tax return for 2012.  Gifts are not ‘ordinary income’ under the tax code.  He gets that money TAX FREE.  It doesn’t matter what his relationship was to the generous friend.  But, if his generous friend’s estate was over the applicable federal exclusion from the estate tax ($5.12 million in 2012), his estate would have had to pay estate tax due.  That’s why it’s called the ‘estate tax’ and not the ‘inheritance tax’–the tax, if over the amount excluded from federal estate tax,  falls on the estate of the decedent, not on those who inherit the assets.

Giving away that family cabin

Dear Liza: I am divorced and own a second vacation cabin that I want my children to have when I die.  Is there a way for me to retain rights, ownership and control while I am alive and of sound mind but pass the property to them when I die that doesn’t have a bunch of overwhelming taxes?  Yes.  Upon your death you can leave the kids the cabin either outright or in a trust. If you leave it to them outright, as tenants in common, each will own 1/2 and can leave their half to whomever they choose when they die. If you leave it to them in trust, you can control how it’s managed and how it would be transferred upon their deaths (as in maybe it has to go to their children or be sold to other family members.) The tax treatment of the gift is that it will go to them free of tax — if there’s a tax to pay, it falls on your estate, but they inherit what’s left free of tax.  The capital gains tax basis on the property will be what it is on your date of death, so if they sell it someday, they’ll owe tax on the gain in value from your date of death to the date of sale. I don’t know what state you live in, but in California, where I practice, a gift from parent to children is also excluded from reassessment of property tax, so they get the property tax rate you were paying.

Death and Taxes: The Basics

Dear Liza: My cousin passed away in 2011, and she had a revocable living trust. My cousins inherited the assets 50/50. The assets were stocks. Do my cousins have to file income tax returns for what they received? Also, am I required to file an income tax return for the trust? Your cousins inherited the stocks at their value on the date your cousin died in 2011. Inheritances are NOT ordinary income under the federal tax code, so they receive those assets free of federal income tax. (We have a federal estate tax; if any tax was due, it would have been on your deceased cousin’s estate, if she owned more than $ 5 million in assets when she died.)  Seven states have an inheritance tax, so they’ll need to check on whether any state inheritance tax is due.  Your two cousins will be responsible for filing income taxes on any dividends they received after inheriting the stocks, and for any capital gains earned when they sell that stock if it has appreciated since they inherited it. You, as Trustee, would be responsible for filing a trust income tax return (Form 1041) if the trust earned more than $600 worth of income between the time your cousin died and the time the trust assets were distributed to the beneficiaries.

Lifetime Gifts

Dear Liza: My friend has a stock portfolio she wants to give me before she dies.  She had cancer and only has a few months to live.  She wants to give it to me now to avoid the whole estate thing.  The total is about $220,000.  Do I have to pay gift tax if she transfers the portfolio to me in kind?  I am sorry to hear that your friend is so ill.  She can give you that portfolio, but it might not be the most tax-effective way to do it.  If she gives you the portfolio before she dies, she (or her estate) must report the gift on a gift tax return by April 15th of the following year. She won’t owe any gift tax on the transfer, because in 2012, each of us can give up to $5.12 million dollars free of gift tax, but any gift over the annual gift tax exclusion amount of $13,000 must be reported on that gift tax return.  If you later sell any of that portfolio, though, you will owe capital gains taxes on the difference between your friend’s basis in that stock and the sales price.   For example, if your friend owned stock in Y Corp., that she purchased for $1 dollar a share in 1982, and that stock is worth $100/share in 2013, you will owe capital gains on that $99/share rise in value.  Alternatively, if she gives you that portfolio upon her death, you will inherit it at the current fair market value for capital gains tax purposes.  In other words, if that Y Corp. stock is worth $100/share when your friend dies, and you later sell it at that price, you will owe zero in capital  gains taxes.  That portfolio will, however, be part of her taxable estate at her death, so, depending upon her other assets, her estate may or may not have to pay estate tax on those assets.  (Currently, she can give up to $5.12 million at death free of estate tax.) So, you and your friend should seek the advice of an accountant to see whether it makes sense for your friend to give you that stock via a Will or a trust upon her death, or during her lifetime.

Using Disclaimers in Estate Planning

Dear Liza: I am the executor of my aunt’s estate in NJ.   She left a number of payable-on-deaht (POD) accounts to me  but her intention was that most of these funds/accounts be given to charity.  I am trying to avoid paying estate and inheritance tax on them, because then the charities will get less.  Is there a way I can redirect them to the charities before they come to me so as to avoid the taxes? When someone gives you something in a Will, or by beneficiary  designation,you can always say, “No Thank You” and not accept the assets, provided you don’t make use of the asset first, and that you do this within 9 months of the death. This is called ‘disclaiming’ the assets. Legally, it’s as if you died first — the asset is then given to whomever is named as the next beneficiary.  In that case, the gift is from the person who died, not from you.  What you can’t do, however, is direct where the assets go next. So, if your aunt left a Will that said everything in her estate was to go to you, then to charity if you did not survive her, your disclaimer would direct those assets to the charity, via that Will. However, if your aunt’s Will did not specify charities as the next beneficiaries, or did not have a Will and simply left those payable-on-death accounts directly to you, and named no second beneficiary, the only way you can give those assets to charity would be to do it directly as a gift from you. If you disclaimed those assets, they would pass to your aunt’s surviving heirs under New Jersey’s law of intestate succession, not to charity. You can give $13,000 per year to any beneficiary free of the gift tax, or $26,000 if you are married and your spouse agrees to make the same gift.

Portability: Worth Filing an Estate Tax Return?

Dear Liza: It is my understanding that in order to preserve the “portability exemption” a surviving spouse must file an estate tax return  (706), which would not be required otherwise. It seems that 706 involves quite a bit of work and additional expenses. Do you think it’s worth the effort?  Surviving spouses of those who died in 2011 and 2012 have that decision to make. The problem is, there’s not an easy answer.  For those who don’t know what the question is, here’s a quick summary: Current estate tax law allows a surviving spouse to use any part of the $5 million exclusion from the estate tax that was available to their deceased spouse but not used by that spouse.  For example, if your spouse died in 2011, and their part of the estate was $1 million, you could use that extra $4 million dollars of unused exclusion to further reduce any estate tax due at your death. Your spouse’s exclusion would be portable to you. Except. There’s always an except. And this time there are couple of them, and they’re all pretty big:

  • In order to make use of that exclusion, you do have to file an estate tax return nine months after your spouse has died.
  • Estate tax returns require a detailed accounting of all of your spouse’s assets, which costs money and takes time to prepare.
  • Once filed, the IRS can examine, without any limitation period, a deceased spouse’s estate tax return to adjust the amount of the deceased spouse’s unused exclusion amount passing to the surviving spouse. 
  • There’s no guarantee that the additional, portable, exclusion will actually be available to you when you die, unless you die in 2012, because the current law expires in 2013.

In the end, you have to decide whether the time and cost involved are worth the potential tax savings down the road. For some people it is; for many, it isn’t.

 

That $5 Million Exemption

Hi Liza,  I read from FAQ on the nolo website, “The $5 million exemption applies to property you give away during life or leave at your death. In other words, you can transfer, either while you are living or at your death, up to $5 million of property tax-free.” So, does it mean that I can pass a $1 million house to my children without any costs? now? If yes, what time is used as the tax basis? Yes, until the current law expires at the end of 2012, you could absolutely give that house to your children free of gift tax. But they would also get YOUR basis in the house for capital gains tax purposes. In other words, if you purchased that house for $25,000 in the 1970’s and now it’s worth $1 million, if you give that house to your kids, and they sell it, they will owe capital gains taxes on all of that gain. If you give them the house only upon your death, their basis in that property would be the fair market value of the property at your death, so all of that gain goes away.  If you make the gift now, also, don’t forget to file a gift tax return by April 15th of the following year.  You are still required to file that return, even though no tax is due.

Gift Tax Rules and Generous Dads

Dear Liza,  My aging dad desires to give me a cash gift ($200,000).  I have read the IRS info about him being able to give me $13,000 per year.  I also understand he could give my wife an additional $13,000 annually without either of us (giver or receiver of gift) having to report to IRS.  But what about a gift of $200,000, can he do that? Yes, he most certainly can. But I really understand your confusion. My clients get this mixed up often, too. Here’s the deal. You’ve got two gift giving concepts collapsed into one. First, you are absolutely correct that your Dad can give $13,000 to as many individuals as he choooses to, every single year, without reporting any of these gifts to the IRS. This is called the annual exclusion from the gift tax. But, if your father wants to give more than that in any year, he can do that, too. He’s also got a lifetime exclusion from the gift tax, and the amazing news is that this year (and next) this is equal to $5 million! To put it mildly, this should cover most of our gift giving ability, right? Your father can give you up to $5 million free of gift tax during his lifetime, or after his death, free of estate tax. He will need to report this gift on a gift tax return by April 15th of the year following the gift, but no tax will be due, provided he’s under that lifetime exclusion limit (which he is). Here’s another way to think about these two exclusions: the lifetime exclusion is sort of like a basketball clock, it gradually runs down as gifts are made during a donor’s life and reported to the IRS;  the annual exclusion is a gift that doesn’t even begin to run down that clock–you can make annual exclusion gifts every year without touching the lifetime exclusion.