Estate Question - Stock Transfer

[JohnH]

A question was posed to me about a potential estate issue. A husband and wife each own 50% of a C-corporation which owns a rental property (I didn't set this up, so no reason to get into the wisdom or lack thereof concerning owning real estate in a corp). Cost basis is about $200K and current FMV of the property is about $700K. The rental property is the only asset of the corp.

The wife has a terminal illness. There are no other heirs involved - only the husband. If the husband transfers his 50% interest to her before she dies by signning his stock over to her, then what happens when she dies? Does he then inherit the stock at its current FMV, which is the FMV of the building?

[BOB W]

A question was posed to me about a potential estate issue. A husband and wife each own 50% of a C-corporation which owns a rental property (I didn't set this up, so no reason to get into the wisdom or lack thereof concerning owning real estate in a corp). Cost basis is about $200K and current FMV of the property is about $700K. The rental property is the only asset of the corp.

The wife has a terminal illness. There are no other heirs involved - only the husband. If the husband transfers his 50% interest to her before she dies by signning his stock over to her, then what happens when she dies? Does he then inherit the stock at its current FMV, which is the FMV of the building?

I'm sure IRS would shoot down this transfer... On the other hand, if she lives long enough it could fly. 5+ years

[JohnH]

Thanks Bob. I don't do estate tax work, so I don't know the significance of the 5+ years you mention? (There isn't any Medicaid or government assistance of any kind involved in her care)

I agree it seems almost too simple, but on what basis would it be shot down?

[BOB W]

Thanks Bob. I don't do estate tax work, so I don't know the significance of the 5+ years you mention? (There isn't any Medicaid or government assistance of any kind involved in her care)

I agree it seems almost too simple, but on what basis would it be shot down?

First the5 years is just a guess.........

I'm sure there is something, I don't know it off the top of my head, that has to do with intent to get a stepped up basis with knowledge of impending death. Many other issues have a look-back period so why not this. Estates have a 3 year look-back period. Transaction in Contemplation of Death always are a problem.......................

[JohnH]

The person who brought this up does estate tax work and should already know the answers, so I suspect bringing me into the picture is just an attempt to do a little CYA. The explanation I was given was that "transfers in contemplation of death" are generally attacked when the transfer is to an heir other than the spouse, and with the intent to get assets out of the future estate. In this case, we are talking about transferring an asset into the future estate. I have no idea if that's an accurate assessment or just more fluff. I've done a little research on the term and the concept but it seems the harder I study, the more confused I become.

[JohnH]

OK, I think I found my answer in Pub 551. Looks like the asset must be held for one year before receiving stepped up basis. Makes sense. Still, that's a fairly liberal rule given the stakes.

Thanks for raising the questions so I'd keep digging.

[BOB W]

While one year may qualify for a step up in basis, it will not satisfy the 3 year look-back.

It is true that transaction between spouses are done all the time with no consequences as a gift tax return in not required ....but... in contemplation of impending death leaves me suspect of this flying without a problem. An estate attorney may not investigate but probably should. Whether IRS would catch this is another issue.