My client called to tell me that his mother had gifted him some income producing farm rental property. The income will be turned over to the mom. Any suggestions on how to handle this? It sounds as though it will be a significant amount.
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There appears to be no economic substance to the transaction. What brilliant "financial advisor" suggested this? -
Maybe not quite so fast.
Presumably the property is worth a lot more than the income it generates. I presume the deal is that the son gets the property, and the mother gets the income for life. But someone else will have to weigh in on just how you handle it. I would think you would have to deal with the present value of the income over the mother's expected life.Evan Appelman, EAComment
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Gift Tax to be filed
I would say on the first part there most likely be a gift tax to be filed.
One the second part the income would then belong to the child and if he gives the money to the mother then a gift tax return would have to filed again (assuming it is over the yearly limit)
DustyComment
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In the tax world, there's no such thing as "turned over." It's either gifted, with possible gift tax implications, paid, with taxable income and possible expense deduction implications, or collected as agent on mother's behalf, with a possibility of either explicit or implied compensation to the son. (The last scenario could easily be an unpaid favor for mom, so don't read too much into my compulsion for being complete.)
The key question is what is the nature of the mother's right to the income? One possibility is that she is keeping a life estate. In many states (possibly all, I don't know for sure), the holder of the life estate is entitled to all income. If that's the case, then a lawyer should be consulted to ensure it's done correctly, if they haven't done so already.
Another possibility is that it's actually a purchase by the son, with an indefinite price, though I would guess there would have to be some sort of limit on the mother's right to the income (e. g. 30 years). This, too, could best be confirmed by an attorney.
Or there could be a business reason we don't know about, or it could just be a gift to the mother under state law, if, for example, she has no legal right to demand the income.
My money is on the life estate, at least in intent if not legally, since that's a very common approach to protecting family assets from nursing home costs. But find out what it really is, and work with a lawyer (which they almost certainly could use).Comment
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On the surface it appears 1. mother files gift tax return.
2. son pays tax on the income it generates yearly plus any depreciable basis of assets other than land will be that of the adjusted basis of mother.
3. son files gift tax returns each year depending on amount of money given to mother.ChEAr$,
Harlan Lunsford, EA n LAComment
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And then...
...son has a stroke when he later disposes of the "non-inherited" property and finds out what his cost basis really is!!
I certainly hope these folks have relied upon some sound financial advice for creating this scenario. My guess is there might be an estate tax issue, mixed in with a possible "WHAT gift tax??" environment for both parent and son, lurking behind the scenes.
FEComment
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No Nursing Home Insurance
Most states have a look back period of 5 years. My guess is they did this to avoid the possibility of the mother maybe having to go in a nursing home (they hope it doesn't happen for at least five years, of course). If this is the case, a life estate could be taken to foot the bill. If the mother just deeded over the land, his basis is her basis. He reports the income and the expense. Instead of "gifting" the mother back, he should just pay her bills.Comment
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