Gift Taxes for Property Transfer Title With Life Estate

[Trying2DoRight]

My parents (mother and step-father) transferred title to their residence to me in order to avoid having an estranged son of my stepfather litigate to get part of the money when my SF passed away. They retained a life estate in the property. Did they immediately owe a gift tax for the transfer?

[Mr. Knowitall]

It's very unlikely that the value of the gift (the remainder interest) exceeds your parents' lifetime gift tax exclusion ($1 million), although it's possible that it exceeds their annual gift tax exclusion ($12,000 - or $24,000 if allocated between them, $12,000 each) such that they are supposed to file a gift tax return. It depends upon what the present value of your remainder interest would fetch if put on the market. Remainder interests are usually not very marketable, so it's possible even there that no gift tax return is required. Note that having to report the gift is different from having to pay taxes now - the IRS just wants to keep a tally, so that it can collect any gift tax owed from the estates (above the lifetime exclusion).

[Bubba Jimmy]

I believe a will would have been a better way for your step-father to have accomplished what he desired. Then you would have received stepped-up basis on the property as of the date of death when the later of the two passed away. This would save you a lot in capital gains taxes, but it sounds like it's too late in your case. Many people try to do their own estate planning and cost their heirs considerable money by getting it wrong.

[Trying2DoRight]

Sorry for the late reply. The rough value of the property is 450K. Since the transfer my stepfather has passed. I assume that no form had to be filed for my SF since the residence was all he had of worth in his estate. The remainder interest (my interest) would definitely be worth more than the 11,000 gift exclusion. Fortunately life estates retain the step-up basis benefit upon the passing of the last life tenant. Sounds to me like it's not something we need to take care of at once. Would you say we can just file the form next April w/ a note attached explaining that my parents weren't aware that they had to file a form since there was no tax owing. My main concern was/is that some sort of penalty could be applied for not filing even though no tax was owing and it was done inadvertently.

[Bubba Jimmy]

You are misinformed. Just because your parents retained a life estate in the property. Assuming the title was properly transferred to you and recorded, this would be considered a gift. Gifts retain the cost basis of the individual giving the gift. This means there would be no step-up to fair market value on the death of either person just because they had a life estate.

Any competent attorney would have advised against doing this, if the property's value had appreciated substantially.

[Trying2DoRight]

There is a definite conflict of info on the web regarding this matter of loss of or preservation of the step-up basis:

"When Jane dies, the house will not go through probate, since at her death the ownership will pass automatically to the holders of the remainder interest, George and Mary. Although the property will not be included in Jane's probate estate, it will be included in her taxable estate. The downside of this is that depending on the size of the estate and the state's estate tax threshold, the property may be subject to estate taxation. The upside is that this can mean a significant reduction in the tax on capital gains when George and Mary sell the property because they will receive a "step up" in the property's basis.
http://www.expertlaw.com/forums/newr...ote=1&p=245111

But note this:

"In 2010, the estate tax is scheduled to be repealed and a new system of allowing some of the assets of a decedent that have been inherited to be sold with a step-up in basis. In order to get a step-up in basis under the new proposed law, the property must pass by reason of death. What this means is that if you die after 2010 and you had a life estate, the remaindermen will not receive a step-up in basis and will have a carry-over basis from you. What ever you paid for the property will become their cost. Had the property been transferred to an irrevocable income only trust, they would have gotten a step-up in basis and could sell the property tax free."

Still another:

"Where the life tenant is not the original grantor, such as where one spouse owns the propertyalone and deeds it to another person, but grants a life estate to the other spouse, the propertywould be neither in the estate of the grantor spouse nor the estate of the life tenant spouse, sinceneither spouse has retained any interest in the property. The problem with this arrangement isthat the remainderman will lose the basis step-up at death, but this may not matter if the propertyis vacation property that is not intended to be sold by the family."

Three different opinions. See how maddning this stuff is??

[Trying2DoRight]

This appears to be a definitive answer, giving the IRS section in the tax code and it appeares to be good news --- for remaindermen, that is:

"Because the retention of a life estate is considered a lifetime transfer with a retained life interest, the value of the residence will be included in the client’s estate at death under IRS Section 2036(a). The inclusion in the client’s estate causes the residence to receive a full step-up in basis under Section 1014, thereby reducing capital-gains taxes paid by the remainder persons in the event that the residence is sold after death."
http://209.85.173.104/search?q=cache...gl=us&ie=UTF-8

[Bubba Jimmy]

You need to seek professional advice. You are finding information that pertains to a trust, and applying to a situation in which you stated that an outright transfer of ownership was recorded. Your use of the term "remainderman" indicates to me that you do not understand, as a remainderman is someone who receives an interest only upon the death of the person having the life estate. If I grant property to Joe for life and then to Jane, Jane is the remainderman. That is not what you described. I believe your situation is, rather, a reversion in which you were given a gift and then you granted a life estate interest to another person and upon that person's death, possession reverts back to you. But this is somewhat complicated, and I would not advise relying on a lay understanding of internet websites if there is a considerable amount of money at stake.

[llworking]

You need to seek professional advice. You are finding information that pertains to a trust, and applying to a situation in which you stated that an outright transfer of ownership was recorded. Your use of the term "remainderman" indicates to me that you do not understand, as a remainderman is someone who receives an interest only upon the death of the person having the life estate. If I grant property to Joe for life and then to Jane, Jane is the remainderman. That is not what you described. I believe your situation is, rather, a reversion in which you were given a gift and then you granted a life estate interest to another person and upon that person's death, possession reverts back to you. But this is somewhat complicated, and I would not advise relying on a lay understanding of internet websites if there is a considerable amount of money at stake.

I am going to disagree. He used the term "they retained a life interest". That is not the OP granting a life interest to them, its them retaining the life interest.

[Trying2DoRight]

[QUOTE][I believe your situation is, rather, a reversion in which you were given a gift and then you granted a life estate interest to another person and upon that person's death, possession reverts back to you./QUOTE]

No, my parents handed me a grant deed that read, "Mother & Stepfather grant to John Doe (me) a married man the property known as xxxxxx - AND RETAIN FOR THEMSELVES A LIFE ESTATE.
So I am the remainderman.