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Inherited Property versus Changing Title prior to Death


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#1 Gloria

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Posted 04 March 2008 - 10:09 PM

The basis of inherited property is generally the fair market value at the date of death. What would be the basis in the following situation: [font="Arial Black"]A single elderly parent was very ill and title to the principal residence was transferred to a daughterís name several months before the death of the parent? The parent had lived in the home for many years until she died[/font]. Would the basis be the parentís basis or would it be the fair market value at the time title was transferred, or something else?????.

Thanks in advance for your response

#2 fredazcpa

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Posted 04 March 2008 - 11:11 PM

Would be the same as a gift. Parent basis

Opps now all the appreciation is taxed to the daughter

#3 mgmea

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Posted 05 March 2008 - 08:39 AM

Would be the same as a gift. Parent basis

Opps now all the appreciation is taxed to the daughter


A gift.....is a gift.......UNLESS it is a gift with a retained interest. Then, under IRC Sec 2036, the transferred property is includable in the decedents estate and gets a stepped up basis to FMV at date of death. Please note that while the code section is titled "Transfers with retained life estate" a formal life estate is NOT necessary to achieve this result.

The elderly parent transferred the home to a daughter and the elderly parent continued to live in the home until the elderly parent died. The elderly parent transferrred property and retained the possession or enjoyment of the property for a period which did in fact not end before his or her death.

Ooopppps........now the daughter actually gets a stepped up basis to FMV at date of death under 2036. Now if only I got a dollar every time someone answered this question that a gift is a gift, I'd be basking on a beach somewhere instead of doing taxes......lol.

#4 Gloria

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Posted 05 March 2008 - 08:43 AM

A gift.....is a gift.......UNLESS it is a gift with a retained interest. Then, under IRC Sec 2036, the transferred property is includable in the decedents estate and gets a stepped up basis to FMV at date of death. Please note that while the code section is titled "Transfers with retained life estate" a formal life estate is NOT necessary to achieve this result.

The elderly parent transferred the home to a daughter and the elderly parent continued to live in the home until the elderly parent died. The elderly parent transferrred property and retained the possession or enjoyment of the property for a period which did in fact not end before his or her death.

Ooopppps........now the daughter actually gets a stepped up basis to FMV at date of death under 2036. Now if only I got a dollar every time someone answered this question that a gift is a gift, I'd be basking on a beach somewhere instead of doing taxes......lol.



#5 Gloria

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Posted 05 March 2008 - 08:50 AM

Thanks for the VERY VERY VERY HELPFULL information --- do you think you can link a "DONATE" button to your member area so that some of us can maybe make your dream (basking on a beach) a reality--YEAH SURE!!!!. Thanks and have a great day.

#6 mgmea

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Posted 05 March 2008 - 09:25 AM

Thanks for the VERY VERY VERY HELPFULL information --- do you think you can link a "DONATE" button to your member area so that some of us can maybe make your dream (basking on a beach) a reality--YEAH SURE!!!!. Thanks and have a great day.


I'm not too good at links, but here are two for Revenue Rulings that illustrate the application of Sec 2036 to a tee.

Rev Rul 78-409

Rev Rul 70-155

Now if I could only figure out a way to collect all the overpaid taxes caused by the "gift is a gift" naysayers I could buy my own island and grow my own frickken bananas........lol

#7 fredazcpa

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Posted 05 March 2008 - 10:38 AM

I stand corrected
but I tought the Life estate had to be a written document IE will

#8 Janitor Bob

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Posted 05 March 2008 - 10:45 AM

I'm not too good at links, but here are two for Revenue Rulings that illustrate the application of Sec 2036 to a tee.

Rev Rul 78-409

Rev Rul 70-155

Now if I could only figure out a way to collect all the overpaid taxes caused by the "gift is a gift" naysayers I could buy my own island and grow my own frickken bananas........lol


....Not so fast!....You need a special permit to grow frickin bananas.....and yes...it is called a frickin permit.

#9 zeke

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Posted 05 March 2008 - 11:01 AM

Bob - you are correct about the frickin permit to grow frickin bananas - BUT, mgmea plans to grow the generic frickken banana - which we all know is grandfathered in under code section 2663.154a(e)2(B)c6, and therefor needs no permit.

#10 Janitor Bob

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Posted 05 March 2008 - 11:32 AM

Bob - you are correct about the frickin permit to grow frickin bananas - BUT, mgmea plans to grow the generic frickken banana - which we all know is grandfathered in under code section 2663.154a(e)2(B)c6, and therefor needs no permit.


....Correct...I was thinking about the "frickin" code and forgot the subsequent allowance under the similar but more leniant "frickken" code

#11 Margaret CPA in OH

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Posted 05 March 2008 - 05:45 PM

What about the "frikken" bananas? Weren't those the originals! I don't remember seeing the "c" before, but then, these days, I don't remember a whole frikkin' lot! (Frikkin is a variant of frikken.)

#12 lbbwest

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Posted 06 March 2008 - 11:04 AM

I'm not too good at links, but here are two for Revenue Rulings that illustrate the application of Sec 2036 to a tee.

Rev Rul 78-409

Rev Rul 70-155

Now if I could only figure out a way to collect all the overpaid taxes caused by the "gift is a gift" naysayers I could buy my own island and grow my own frickken bananas........lol


Before you retire to the islands on the overpaid taxes, I believe a point should be clarified. I contacted my attorney as this issue continues to be brought up and applauded. IN MICHIGAN there is NO LIFE ESTATE CREATED unless it is specifically written as a LIFE ESTATE. The parent can't just "put the name" on the deed and create it. IF the transfer is written subject to the Life Estate, no problem you get your bananas, mom stays in the house, step up in basis upon death. If not, gift created, no step up in basis. lbb

#13 mgmea

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Posted 06 March 2008 - 07:56 PM

Before you retire to the islands on the overpaid taxes, I believe a point should be clarified. I contacted my attorney as this issue continues to be brought up and applauded. IN MICHIGAN there is NO LIFE ESTATE CREATED unless it is specifically written as a LIFE ESTATE. The parent can't just "put the name" on the deed and create it. IF the transfer is written subject to the Life Estate, no problem you get your bananas, mom stays in the house, step up in basis upon death. If not, gift created, no step up in basis. lbb


If a formal life estate is required, why did the IRS say in the first revenue ruling I cited:

"Transfer of residence to child; continued use and enjoyment. The entire value of a residence occupied by a decedent and the decedent's child and conveyed in fee simple to the child by the decedent, who continued to enjoy unrestricted use and possession of the entire residence until death, is includible in the gross estate of the decedent under section 2036(a)(1) of the Code."

If a formal life estate is required, why did the IRS say in the second revenue ruling I cited:

"The value of a residence occupied by the decedent-donor after transfer of the property, pursuant to an understanding by all parties, is includible in his gross estate."

If a formal life estate is required, why do the IRS instructions for Form 706 state on page 15:

"A retained life estate does not have to be legally ebforceable." They then go on to give a specific example where no formal life estate existed, yet the houe was includable in the gross estate.

If a formal life state is required, why do all the court cases cited in the revenue rulings not require one to include property in the gross estate under 2036?

If you can answer these questions, you get a frickin banana.......lol

#14 lbbwest

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Posted 07 March 2008 - 08:06 AM

If a formal life estate is required, why did the IRS say in the first revenue ruling I cited:

"Transfer of residence to child; continued use and enjoyment. The entire value of a residence occupied by a decedent and the decedent's child and conveyed in fee simple to the child by the decedent, who continued to enjoy unrestricted use and possession of the entire residence until death, is includible in the gross estate of the decedent under section 2036(a)(1) of the Code."

In Michigan it is not a legitimate transfer unless it is in writing and so stated on the deed. (The "Life Estate" does not have to be a separately written document, but somewhere it HAS to be stated that the transfer is pursuant to "continued enjoyment" of the property.

If a formal life estate is required, why did the IRS say in the second revenue ruling I cited:

"The value of a residence occupied by the decedent-donor after transfer of the property, pursuant to an understanding by all parties, is includible in his gross estate."

In Michigan "the understanding by all parties" MUST be in writing.

If a formal life estate is required, why do the IRS instructions for Form 706 state on page 15:

"A retained life estate does not have to be legally ebforceable." They then go on to give a specific example where no formal life estate existed, yet the houe was includable in the gross estate.

In Michigan the transfer never occurred unless it was in writing. There for it WOULD automatically BE in the gross estate.

If a formal life state is required, why do all the court cases cited in the revenue rulings not require one to include property in the gross estate under 2036?

Just as I have addressed your questions, I would have to look at each case and contact my attorney regarding the same. I don't have time.

If you can answer these questions, you get a frickin banana.......lol


I don't believe in advising clients regarding ANY transfer of property without legal counsel. Nor do I interpret legal transfers of title without legal counsel. Earlier yesterday there were posts regarding various state TAX authorities not following Federal Tax rulings, there are states that allow same-sex marriages, yet the IRS does not. I don't understand what the big deal is, IF the title is transferred subject to continued enjoyment then pay the attorney $150 to have it stated that way. Otherwise, I firmly believe you are opening up all kinds of cans of worms.

If I have contacted a licensed attorney in Michigan and have been advised as above, it would be negligent for me to proceed as you have suggested. We agree to disagree.

You keep the bananas, I'll keep my license.

#15 lbbwest

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Posted 07 March 2008 - 08:25 AM

CLARIFICATION of why this issue bothers me.

It's not a perfect world.

Most people put the adult child's "name on the house" to avoid probate, Medicaid pay back issues, or both. In order to do that LEGALLY without an estate then they have to divest themselves of the property, which makes it a gift. (No step up in basis.)

If it's includible in their estate and there for stepped up basis, then it's also subject to probate and Medicaid issues.

IF the transfer IS subject to a Life Estate in writing, then you have a much closer to perfect world. lbb

#16 mgmea

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Posted 07 March 2008 - 09:39 AM

CLARIFICATION of why this issue bothers me.

It's not a perfect world.

Most people put the adult child's "name on the house" to avoid probate, Medicaid pay back issues, or both. In order to do that LEGALLY without an estate then they have to divest themselves of the property, which makes it a gift. (No step up in basis.)

If it's includible in their estate and there for stepped up basis, then it's also subject to probate and Medicaid issues.

IF the transfer IS subject to a Life Estate in writing, then you have a much closer to perfect world. lbb



lbb, I agree that a formal life estate is the way to go when advising clients on the issue before the transfer is made. The OP's question seemed to infer this was all a done deal. I was merely trying to point out that a gift is not always a gift when there is a retained interest. Your attorney is correct that no "formal" life estate exists unless it is conveyed in writing in the deed. It is well documented however in the numerous revenue rulings and court cases that I cited that an "implied life estate" caused the GIFTED house to be included in the decedent's estate and receive a stepped us basis.

I have always been told by attorneys that the use of a life estate does not cause the house to be a countable or recoverable asset for Medicaid purposes. They have also advised me that there is no problem with probate in these cases as assets includeable on the estate tax return by reason of a life estate are not included in probate. Your mileage in MI may very.

As far as loosing one's license, I have been advised by an attorney that no one has ever lost their license for preparing a tax return based on taking a position favorable to the client when that same position had been argued sucessfully by the IRS in a court case. There have been numerous malpractice cases however where the practioner failed to take a position beneficial to the client when that same position had been argued sucessfully by the IRS in a court case.

#17 lbbwest

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Posted 07 March 2008 - 10:16 AM

lbb, I agree that a formal life estate is the way to go when advising clients on the issue before the transfer is made. The OP's question seemed to infer this was all a done deal. I was merely trying to point out that a gift is not always a gift when there is a retained interest. Your attorney is correct that no "formal" life estate exists unless it is conveyed in writing in the deed. It is well documented however in the numerous revenue rulings and court cases that I cited that an "implied life estate" caused the GIFTED house to be included in the decedent's estate and receive a stepped us basis.

HOWEVER, WILL ALSO BE PROBATED, AND SUBJECT TO MEDICARE RULES.

I have always been told by attorneys that the use of a life estate does not cause the house to be a countable or recoverable asset for Medicaid purposes. They have also advised me that there is no problem with probate in these cases as assets includeable on the estate tax return by reason of a life estate are not included in probate. Your mileage in MI may very.

IF IT'S IN WRITING ONLY.

As far as loosing one's license, I have been advised by an attorney that no one has ever lost their license for preparing a tax return based on taking a position favorable to the client when that same position had been argued sucessfully by the IRS in a court case. There have been numerous malpractice cases however where the practioner failed to take a position beneficial to the client when that same position had been argued sucessfully by the IRS in a court case.


I WAS TALKING ABOUT PRACTICING LAW WITHOUT A LICENSE.

Optimistically we are done now.

#18 mgmea

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Posted 07 March 2008 - 11:53 AM

Are you an attorney llb, or do you just play one online?

>>"HOWEVER, WILL ALSO BE PROBATED, AND SUBJECT TO MEDICARE RULES."<<

My attorney is still laughing at that quote. He's wondering how an entire fee simple interest in a decedent's house that is gifted before death via a properly recorded warranty deed with an implied life estate is subject to being transferred again in a probate proceeding. When the same house is gifted with a written life estate on the deed it is not included in probate? Only in Michigan he guesses. And MEDICARE has absolutely nothing to do with this case.

Thankfully the OP did not have any MEDICAID concerns indicated in her original post. If she studies the revenue rulings I posted links to and the court cases listed therein, she will find out how the tax courts have treated cases with the exact same factual situation as her client.

I would only request that all the "gift is a gift with carryover basis naysayers" refrain from stating their opinion as fact when the gift involves a retained interest. Please feel free to post any citeable authority for your opinions. Please do not blast me unless you have taken the time to read the citeable authority I cited.

THANK YOU!

#19 michaelmars

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Posted 07 March 2008 - 12:28 PM

You should see how i was blasted last year for giving the same opinion will i posted the entire ruling. hang tuff mgmea

#20 lbbwest

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Posted 07 March 2008 - 01:32 PM

Are you an attorney llb, or do you just play one online?

>>"HOWEVER, WILL ALSO BE PROBATED, AND SUBJECT TO MEDICARE RULES."<<

My attorney is still laughing at that quote. He's wondering how an entire fee simple interest in a decedent's house that is gifted before death via a properly recorded warranty deed with an implied life estate is subject to being transferred again in a probate proceeding. When the same house is gifted with a written life estate on the deed it is not included in probate? Only in Michigan he guesses. And MEDICARE has absolutely nothing to do with this case.

Thankfully the OP did not have any MEDICAID concerns indicated in her original post. If she studies the revenue rulings I posted links to and the court cases listed therein, she will find out how the tax courts have treated cases with the exact same factual situation as her client.

I would only request that all the "gift is a gift with carryover basis naysayers" refrain from stating their opinion as fact when the gift involves a retained interest. Please feel free to post any citeable authority for your opinions. Please do not blast me unless you have taken the time to read the citeable authority I cited.

THANK YOU!



Apparently we are NEVER going to be finished with this issue. You do not wish to agree to disagree? I am please to hear that your attorney was so amused at my post, he obviously has a sophisticated sense of humor and has never posted on line. I was typing quickly and meant to type MEDICAID, instead I typed MEDICARE, gee I'm probably the first person to do that ever.

I am going to start from scratch AGAIN. Taxpayer comes in the office, taxpayer says "MOM put the house in my name several years ago so that she could become eligible for Medicaid AND so that I would not have to go through Probate, because she heard it's very expensive. She died in 2007; I sold the house, since I inherited the house, I have no Capital Gains, right? My friend told me this, and she reads the ATX board all the time."

Was she on Medicaid? Was the estate probated? Did she have a will? Did she consult any attorney?

Your jab about playing an attorney on TV was unwarranted since I was maintaining transfer of real property needs to have an attorney involved. Simply advising preparers to take the step up in basis for an "implied Life Estate" is your right. I have the right to my opinion, and I shall continue to consult with attorneys regarding whether an implied life estate exists. lbb




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