Life Estate Questions

[JoshinNC]

I hope some of you deep thinkers can follow my example below and let me know if I am missing something.

TP transfers 1/5 interest in house to each of 5 children on 1/1/07, maintaining a life estate in the house. The value of the house on the date of transfer is $100,000. Per TTB page 21-24 this transfer meets the requirements of a completed gift to the children. $55,000 of the transfer is excluded under the TY2007 annual exclusion (5 gifts of $11,000 each) and the other $45,000 is not taxable for gift tax as it is less than the lifetime exclusion (assume no other prior gifts). TP dies 11/1/08. The $45,000 that was excluded under the lifetime exclusion is brought back into the estate as an adjustment.

Is this correct?

Does the life estate have any bearing on the facts?

Thanks in advance!

[JG EA]

See page 27. If the person with the life estate is in possession until death it is not a completed gift until then.

[Burke]

I agree. The retaining of a life estate makes it an incomplete gift. The entire FMV of the house is part of the decedent's estate, making it eligible for stepped-up basis to the children. If they had sold it prior to taxpayers death, there would have been some effect of the life estate attributable to the donor and cap gains to the donee's on the profit. Had the taxpayer qualified for Medicaid, there would have been some effect due to the life estate. However, since none of that happened, it's treated the same as if they inherited the house at his/her death.

[Jesse]

But isn't the partial interest considered a completed gift?

The value of the gift is figured using a present value table and at death the remainder interest from the deceased completes the gift with the entire property receiving stepped up basis if the deceased remained a life tenant.

I don't have time to look right now, but I thought a gift tax return needed to be filed if the present value exceeded the annual gift exclusion.

[JG EA]

Only if you gift the actual life estate (allow someone else to have life estate in the home).
I think in those pages it was taking about stuff like that. Read the page 27 and see what you think.

[JoshinNC]

That's what was tripping me up

See page 27. If the person with the life estate is in possession until death it is not a completed gift until then.

I kept coming back to the fact that the TP still held the life estate and wondered whether that made it an incomplete gift. Does anyone know a code section or publication to reference on this and I will be on my merry way.

Thanks again JG, Burke and Jesse!

[New York Enrolled Agent]

I don't believe there is any automatic "yes" or "no" answer as to whether a transfer of property with the transferor keeping a life estate is a completed gift. It may be a completed gift. But, my understanding is that, if the transferor retains any special powers of appointment to change the interests of the persons who received the remainder interests, then the gift is incomplete and not subject to gift tax.

[solomon]

NYEA is correct. See §25.2511-2. This is why an Enhanced Life Estate Deed, also known as a Lady Bird Deed, is superior to a regular Life Estate. I have used it in Texas. At times, I believe they are referred to as Defective Life Estates.

From 25.2511-2(b):

As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete.

From 25.2511-2(d):

A gift is not considered incomplete, however, merely because the donor reserves the power to change the manner or time of enjoyment.

Note in PLR 1640160-01 by the father reserving the power to revest the property to himself is what made it an incomplete gift.

http://www.irs.gov/pub/irs-wd/0308046.pdf

Here is a link to one on file in Florida.

http://images.pascogov.com/deed.aspx?c=6128|1577|0&type=pdf