sale of life estate property

[BOB W]

It's generally not an incomplete gift. It's a complete gift of a future interest.

Take a look at this article, which describes various Florida options, including the difference between the traditional life estate (complete gift) and enhanced life estate (incomplete, because there's a power to revoke).

WOW.........!!!!!!!! OK.... I will have to review the calculation method for "Gifts of Future Interest". Thanks for the clairification.

The article says a gift tax return "May or May not" be required for Traditional Life Estate. Is that because the value of the calculated gift may fall below gifting threshholds or what?

ADDED: I did a quick research and could not find where any discount off of FMV of the gift is calculated. There has to be a discount calulation because it is a gift of future interest with NO current value other than a right of possession down the road.

ADDED AGAIN: I found an IRS explanation for doing the calculation:

http://www.irs.gov/pub/irs-pdf/p1457.pdf

[Gary2]

If I may expand on this thread............. I have heard that creating a Life Estate CAN cause a gift tax return at the time of creation of the Life Estate.. I never understood why because of the "incomplete" nature of the transfer.

Is it because of the value received or what? To me it is $0.......................

It's generally not an incomplete gift. It's a complete gift of a future interest.

Take a look at this article, which describes various Florida options, including the difference between the traditional life estate (complete gift) and enhanced life estate (incomplete, because there's a power to revoke).

[BOB W]

If I may expand on this thread............. I have heard that creating a Life Estate CAN cause a gift tax return at the time of creation of the Life Estate.. I never understood why because of the "incomplete" nature of the transfer.

Is it because of the value received or what? To me it is $0.......................

[BOB W]

The deceased husband was the owner of the property and the title was changed upon his death to the ten children with the life estate to the spouse. Since the husband was the owner, when he passed away, the property was appraised at his date of death. Since the wife was not an owner, her death had no effect on the basis. Actually, the way this particular document was written, the spouse could not sell or borrow on the property as each of the children would have to sign on the documents.

Incidentally, the 1099-S was issued to each of the ten children indicating their share only.

That all makes sense........thanks........

[DMICPA]

Bob W.

The deceased husband was the owner of the property and the title was changed upon his death to the ten children with the life estate to the spouse. Since the husband was the owner, when he passed away, the property was appraised at his date of death. Since the wife was not an owner, her death had no effect on the basis. Actually, the way this particular document was written, the spouse could not sell or borrow on the property as each of the children would have to sign on the documents.

Incidentally, the 1099-S was issued to each of the ten children indicating their share only.

[Gary2]

Don't get hung up on the incomplete gift aspect. I don't believe it's relevant to the step up in basis.

If person A gives away property but keeps a life estate, and then passes away, then IRC section 2036 says the property is included A's estate. The idea is that you can't avoid the estate tax by doing things that have the same result as bequeathing the property to an heir. Once it's included in the estate, it gets the benefit of the stepped up basis, except for those electing the weird 2010 rules. The question of whether or not the gift tax applies at the time of creating the life estate is a separate question.

In the case where the husband bequeathed a life estate to the wife and a remainder interest to the children, then wife isn't the one who transferred the property (as stated in section 2036). Or, as Bob clearly phrases it, she was never an owner.

[BOB W]

Ok ........I'm going back to work, thanks for hanging in with your replies.......

[DMICPA]

Life Estate

It may have very well been repealed. I did my research for a 2010 1040 and, after an inordinate amount of time, this is the position I took on this return.

I did this on April 3 so I did not continue to see what happened to this ruling subsequent to the 2010 year. I realize that this could have been repealed because they kept refining and changing the rules.

[BOB W]

I had a situation where the husband died and in his Will the home was transferred into a life estate whereby the wife could live in it until she died. The ten children were the remaindermen.

When the wife died, the home was valued at the DOD value at the Husband's death, not the wife. The wife was not the owner of the home and therefore her date of death did not cause a step-up in basis.

Thank you for making that clear, in words I understand. My question is, How does that relate to this thread's original question? You are saying that the creator of the life estate is the one where FMV is used. I would also assume that the wife was never an owner of the property because if she was His will would not bypass her ownership.

Your points are a nice addition to issues surounding Life Estates.

[Gary2]

For decedent's dying after 2009 IRC 1022(d)(1)(B)(iii) states that a decedent's holding of a Power of Appointment over property will not be deemed to give the decedent ownership of the property for purposes of allowing the executor to increase the basis of the property beyond the carryover basis value.

I believe some of the earlier answers were correct if the person died before 2010.

Obviously, this is a complicated issue but I found the code section and it contained information different than the "completed gift" scenario that applied before 2010.

Isn't this the 2010-only code section? The Cornell US Code library shows it as repealed, though I recognize that they can be out of date.

[DMICPA]

Life Estate

I had a situation where the husband died and in his Will the home was transferred into a life estate whereby the wife could live in it until she died. The ten children were the remaindermen.

When the wife died, the home was valued at the DOD value at the Husband's death, not the wife. The wife was not the owner of the home and therefore her date of death did not cause a step-up in basis.

[BOB W]

For decedent's dying after 2009 IRC 1022(d)(1)(B)(iii) states that a decedent's holding of a Power of Appointment over property will not be deemed to give the decedent ownership of the property for purposes of allowing the executor to increase the basis of the property beyond the carryover basis value.

I believe some of the earlier answers were correct if the person died before 2010.

Obviously, this is a complicated issue but I found the code section and it contained information different than the "completed gift" scenario that applied before 2010.

Like I said, smart is not my thing. Can you tell me what that means?

[DMICPA]

Life Estate

For decedent's dying after 2009 IRC 1022(d)(1)(B)(iii) states that a decedent's holding of a Power of Appointment over property will not be deemed to give the decedent ownership of the property for purposes of allowing the executor to increase the basis of the property beyond the carryover basis value.

I believe some of the earlier answers were correct if the person died before 2010.

Obviously, this is a complicated issue but I found the code section and it contained information different than the "completed gift" scenario that applied before 2010.

[BOB W]

A transfer with a life estate may or may not be a completed gift. There is no absolute answer. If the transfer document contains special powers of appointment, then the gift is incomplete. Otherwise Reg. §25.2511-1(e) would suggest that the transfer requires application of the gift tax.

Your point is beyond my knowledge (as are many issues on the board). Why would a lawyer not set up the proper Life Estate and why shouldn't I take it for granted that it was done properly?

Most, if not all, clients only come to me after a Life Estate is in place. It is not my job to audit every document that clients have. I am not practicing law.

Your point is a good one and is useful info at some point.

[New York Enrolled Agent]

It was an incomplete gift when it was put in son's name, ( Mom retained all rights of ownership) so Mom's basis does not apply. Upon Mom's death (the gift, which is no longer a gift) is completed and treated as an inheritence for tax purposes. Thus FMV applies on the date of death.

If Mom decided to sell the property during her life time, the property would be first transferred back to her and then sold in her name with all rights of residency.

A transfer with a life estate may or may not be a completed gift. There is no absolute answer. If the transfer document contains special powers of appointment, then the gift is incomplete. Otherwise Reg. §25.2511-1(e) would suggest that the transfer requires application of the gift tax.