Gift Tax

[dmj4]

I have a client that has inherited 80% of an estate and her brother inherited the other 20%. They had to battle with other relatives in court to get the money.

To get her brother to join her fight against the other relatives, my client promised her brother that she would give him part of her 80% to even up the amounts they received. He may have joined against her because he was not happy that he was only mentioned for 20% in the will.

The estate is now ready to close. Her attorney approached me with the question of gift tax. He stated that there may be another will out there and that the brother seemed to be planning to contest the will until my/his client promised the brother the money. The attorney wants me to determine if they (both lawyers) prepare and sign an "agreed order" between the two parties to drop any future law suits regarding the settlement in exchange for a 50/50 division if that would hold up in tax court regarding gift taxes. The attorney is only asking me about gift tax and this document, not the legality of the document for his purpose.

Any opinions or experience with an issue like this?

In one way, I think of it as being no different than any other legal issue when a settlement is involved except the Judge will not be signing off on it. In another way, I think that because the Judge ruled that she was entitled to her 80%, changing that would just be a loop hole to avoid gift tax.

She did promise him the money, gift tax or not and his attorney will try and make sure that he gets it.

Thanks

[natiro]

Gift tax

Has your client or her attorney considered a qualified disclaimer of the property? It would have to be made within 9 months of the date of death to be qualified. A transfer by qualified disclaimer escapes any gift tax consequences.

As for your actual question, I'm not sure that a signed legal document would change the gift tax consequences of this transfer but I'd have to do some research on that.

However, in general, a transfer is not subject to the gift tax if the transferor receives adequate consideration in exchange for the property transferred. Consideration for this purpose includes amounts received in money or money’s worth and includes both tangible and intangible property. Consideration that has no measurable monetary value doesn't count. In your case, I'm not sure that I see that the "signed order" has a measurable monetary value, but maybe I'm missing something obvious!

[OldJack]

Well... its been quite a while since I saw anything on a "settlement" payment or agreement of an estate, but as I recall it is not a gift but simply a settlement of who gets what much like or in lieu of the probate judge who otherwise decides the same and has nothing to do with gift taxes or income taxes.

[Snaggletooth]

Forks in the Road

Donna, I think there are two roads from the fork:

#1. The deceased did not bequeath any more than the 20% to the brother. If the 80% holder "gave" the brother a greater share, then the amount "given" is a gift from her to him. The transaction is separate from the 20% inherited. If more than $12,000 then there are gift tax consequences.

#2. The above is true if the additional amount given to the brother is a "gift." If there existed a corollary agreement serving as "consideration" then the obvious "strings attached" would disqualify it from being a gift.

However, disqualification as a gift opens up the door for other taxable income, possibly even compensation for all I know. This means the brother himself would have to pay tax on the amount exceeding 20%. If the amount is not a gift, neither is it an inheritance, then just exactly what is it?

I'm sure not the expert on this one, but I believe the element of consideration launches "Other" income. Will look forward to hearing from others. Natiro is one of our sharper folks, and I'm glad she contributed.

[OldJack]

RIA 2007 Federal Tax Handbook:

Paragraph 1384 Inheritances.

Tax-free bequests, devises and inheritances are money and any property that pass on the death of a person by his will or under intestacy, including amounts received in settlement of a will contest.

bold added by this poster.

[natiro]

Gift

Is it considered a settlement if the court has not signed off on it? Seems to me this is just an agreement between the 2 beneficiaries.

[OldJack]

I would expect that an agreement that settles any dollar dispute of an estate would normally be called a settlement. Unless the judge is required to sign something they usually don't want to get involved as that means they have to do some work. I have no statistics but would be surprised if most such contested estate cases were not "settled" out of court (unless of course it is a required probate asset involved).

As this case was posted it would appear to me that the 2 beneficiary parties are indeed proposing a settlement and therefore the resulting inherited amounts for each would have no gift or income tax consequences. The only reporting of the fact would be the end result showing as to who gets a total amount on page 2 of the estate tax return (if required to file).

[natiro]

Gift tax

I would expect that an agreement that settles any dollar dispute of an estate would normally be called a settlement. Unless the judge is required to sign something they usually don't want to get involved as that means they have to do some work. I have no statistics but would be surprised if most such contested estate cases were not "settled" out of court (unless of course it is a required probate asset involved).

I believe the original post says that the judge has already ruled that the client gets 80%, which is what the governing instrument (the will) directs. Given this, I'm not sure that an agreement between the two beneficiaries would change the nature of the transfer.

[OldJack]

Of course the details is something that only the attorneys know for sure, but I read the post that the court case was to keep other relatives from being beneficiaries and not a fix of percentage or specific assets probated to anyone. However, you could be right that it was a full probate of the will. Also, it appears the agreement was before any determination in court and could still be considered a settlement by the parties and considered the same for federal taxes. We don't know from the post but the judge may have even ruled 50-50 in consideration of the beneficiaries settlement agreement.

In any case, tax law would appear that whatever proceeds the "estate" actually distributes according to the court and/or settlement agreement would be the parties tax-free inheritance for federal income tax purposes. I'm sure that if someone is willing to spend the proper research time this question of settlement could be easily verified or found otherwise.

[dmj4]

Judge did not rule 50/50

The Judge did not rule 50/50. It did not go to court. Once the other relatives agreed to drop suit because of accepting a payoff from the two named beneficiaries, there was no longer a contest against the will. In the end, the Judge just signed off on the assets being released. This has been going on since 1991.

[OldJack]

The Judge did not rule 50/50. It did not go to court. Once the other relatives agreed to drop suit because of accepting a payoff from the two named beneficiaries, there was no longer a contest against the will.

This then appears to be a classic example of a settlement with the beneficiaries/all parties only inheriting what they actually receive. No gifts, no tax consequences.

[Unregistered]

My gut feeling is that a distribution of 50/50 made by the estate is inheritance, If the equalization occurs at the beneficiary level it's a gift. And I believe in a probate estate the judge does approve the distributions.