Adding names to deed JUST before death

[Unregistered]

I have a client that two days prior to death added all three of her children to the deed of her home. They simply did this to avoid probate. Does this constitute a gift whereby receiving carry over basis? Obviously, we would like to receive the step-up in basis for property inherited. Any thoughts?

[Bees Knees]

TTB, page 21-28, "Unless the surviving joint tenants can prove they provided consideration for their shares, the entire value of property held in joint tenancy is included on Form 706 and receives stepped-up basis."

In other words, the kids get stepped-up basis.

[Koss]

Transfer prior to death

This topic was the subject of a lengthy debate last year on the other board. We did not reach a consensus. I think I can summarize some of the key issues.

The client scenario discussed last year was a bit different in that the transfer occurred a couple months before the person's death. Depending on your perspective, this may or may not make a big difference.

One thing is fairly certain: Whether the transfer occurs a couple months or a couple hours before death, it is close enough that the value of the transferred property is still going to be included in the decedent's estate.

This fact led many to believe that since the value of the asset is subject to estate tax, it should not also be subject to income tax for the transferee. I am using the term transferee instead of heir or donee precisely because the whole question is whether the asset should be treated as a gift or an inheritance.

My personal conclusion was that the treatment of the asset under the US Code governing estate tax probably has no impact on the treatment of the asset under the US Code governing income tax. In the absence of an explicit reference in one code section to the other, any attempt to tie them together, or interpret one in view of the other, seems to me to be like trying to tie together cigarette taxes and gasoline taxes. I just don't see a relationship. I concede that both code sections are applicable to the same asset, but it does not follow from this fact that the definitions used in one code section can be used to interpret and apply the other code section.

The key issue is this: The fact that the asset still has to be included in the value of the estate strongly implies that at least within the scope of the estate tax law, it is not treated as a gift, but rather as an inheritance, because the transfer occurred too close to death. Some argue that this allows one to treat it as an inheritance for purposes of income tax (i.e., determination of basis). It is here that I have difficulty accepting the use of a definition in one code section for application in a totally different code section.

With that being said, there is a different argument I found rather persuasive, at least in the context of the case we discussed last year, in which the person added her daughter's name to the deed to her home a few months before her death.

There is apparently some case law or other guidance, which I am unable to cite, which supports the position that this type of transfer is an incomplete gift. The idea here is that the IRS somehow recognizes that parents do this as an estate planning mechanism, or as you put it, "to avoid probate," but that the parent is not really relinquishing any control over the asset. Therefore, it is argued, based on the principle of substance over form, that the child does not really acquire any meaningful ownership of the house until the parent's death, and it is therefore treated as an inheritance for purposes of determining basis.

This argument is strengthened in cases where it can be shown that from the date of the transfer until the date of death, the transferee did not live in the house, did not contribute financially to its maintenance, and made no mortgage or real estate tax payments.

The weakness of this argument is that to some degree, and this will vary with the context, the proper interpretation and application of federal income tax law relies on facts that are established by state law. This is not to say that state law somehow trumps federal law, but rather that certain federal laws cannot be coherently interpreted without recognizing certain facts that are determined by state law.

When a parent adds their adult child's name to the deed to their home, this has certain consequences under state law, namely that the child is deemed to own half the house. The parent now needs the child's signature to sell the house, and the child's interest in the property could become subject to attachment by the child's creditors. And creditors don't have to wait until the parent dies. These facts militate against the "incomplete gift" interpretation.

But this is hadly the first time that state law appears to be in conflict, or in tension, with federal law.

Perhaps someone on this board can find a definitive answer to this question. But I'm not optimistic. Last year there was an incredibly stimulating and productive debate, but no one, to my knowledge, produced a conclusion that was crystal clear and supported by case law or an unambiguous citation to the US Code. There were citations to the US Code, to be sure, but they remained clouded in the debate over whether it was appropriate to import concepts from the estate tax law into the income tax law.

Burton

[Matt Sova]

Added to the deed

I have researched this in the past and what I came up with is full step up in basis when the kids are added to the deed without providing payment.

A situation that I have on my hands is even worse than that. In 2001 Mom quit claimed house to Daughter and Son. D is my client. Mom is now in nursing home and D & S sold the house to help pay for mom's care. Mom had always lived in the house, but does not own it. D & S haven't lived there since they were kids. Kiss the 121 exclusion goodbye. Very little basis - house was built in 1946.