Tax consequence?

[ILLMAS]

I was caught off guard with the following scenario:  TP mother became ill, a week before her passing, all the son/daughter(s) and through an attorney removed the mother from the deed from 5 properties she owned and includes the 5 siblings to co-own each property.  To me this doesn't sound like an inheritance, it's more like a gift.  Do you think they did the right thing or will this cause a tax consequence for each sibling?

 

Thanks

 

MAS

[Lee B]

I hope this attorney knew what they were doing?

1.  No step up in basis for the sons/daughters.

2. The FMV of the gifts reduces her estate tax credit. 

How good or bad this turns out depends on the the FMV and  the original basis of each property plus the value of her total estate.

[OldJack]

Well... It may not be a gift just because a deed was modified.  The question is did the kids actually take possession of the properties in any way.  If not it could still be no gift accepted and therefore an inheritance.  The bad think is the removal of the mother from the deed would imply a sale or gift.

 

Edited August 3, 2015 by OldJack

[rfassett]

It might be a moot issue. Death bed transfers like this are usually reversed due to the look back period. I would be surprised if the properties were not pulled back into the mother's estate for estate and/ or inheritance tax purposes thereby subjecting the properties to inheritance rules.

[ILLMAS]

FYI No Estate in this case

[Lion EA]

There's always an estate.  It might not have a filing requirement.

[SaraEA]

Things have changed since we "seasoned" preparers first learned about gift/estate taxes.  The look-back period now applies only to gifts made TO the decedent, retained life estates and interests, closely held businesses, and a few other oddballs.  (See the 706 instructions, pp 26-27). Also, any gift taxes paid within the past three years get added back into the estate.

I'm doing one of these right now.  Mom gave her sons some stocks she had owned for 50 years; the stock certificates were retitled and legally transferred 4 days before she died.  (The process had to start before then.)  The step-up basis would have helped them avoid massive cap gains they now face.  Thankfully she did not transfer her shares of ATT and its baby bells, and their babies, so the sons get step up on those.  It has to be every preparer's nightmare to calculate basis of original ATT shares.

[rfassett]

Look back periods for State inheritance/estate tax purposes will differ from State to State and State to Federal.  My State uses a strict 1 year look back period for gifts made prior to death.  There is a $3,000 exemption per year.  But the fact remains, in my State, the transfer by ILLMAS's client would be pulled back  into the estate for inheritance tax purposes.  Check your State law.  If it follows anything close to my State law, you may be able to formulate an argument that the transfers were never made.  Might be a stretch.  But worth investigating.

[SaraEA]

Agree, state rules will differ.  Several do include gifts made within one year of death in the estate.  Probate fees are based on the decedent's assets, so even if under the threshold for a 706 some money will be due on the gift.

What bothers me is that the transfer was made when the mother was ill and about to die.  To sign a legal document, a person has to be mentally competent.  Honest attorneys will not take a signature from someone on their death bed.  (I know first hand.  My brother-in-law dragged a lawyer into the hospital so my sister could sign a will, leaving everything to him.  The lawyer took one look at her and said no way.  She died intestate.)  Maybe the lawyer can be embarrassed into undoing the transfer.

By the way, finished that gift tax return today.  The sons are facing a gain of over a half million.  Four days later and they would have gotten step-up basis.  At least in this case she had all her mental faculties when she initiated the gift.  Not sure if that's true with Illmas's clients.