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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Inheritance Taxes

Customer Question

My father is in poor health and is panicking as to how his death is going to affect the family in inheritance taxes. He has about 1500 acres of farm land in Marshall County, Tennessee. There are 4 children, all above 21, and a surviving wife. He thinks the taxes on the land will wipe us all out so he is selling off parcels of land to strangers thinking money in the bank is better. I remember reading something about it being possible to sell the land to the children for $1 before you die and therefore it is not an inheritance problem anymore. Is there anything to this or what are our legitimate options. My Dad is driving us nuts, please help!
Thanks,
CXXXXX XXXXX [email protected]
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

For purposes of my answer I am assuming your Father is not survived by any spouse.


The U.S. imposes an estate tax on estates of decedents with a net taxable estate in excess of $1,500,000 (rising to $2,000,000 in 2006). The net taxable estate is defined as the gross fair market value of all the decedents assets less allowable deductions such as outstanding mortgages, other debt, funeral expenses, estate administration expenses and other final expenses. The botXXXXX XXXXXne is that there is not even a requirement to file an estate tax return unless the gross fair market value of your Father's assets exceeded $1,500,000 (including any taxable gifts made in the three preceeding years) before allowable deductions.


TN does also impose an inheritance/estate tax that is designed to be the equivalent to the maximum allowable U.S. credit for state death taxes paid (albeit you may no longer take a credit, just a deduction on the Federal estate tax return). For 2005 the first $950,000 (rising to $1,000,000 in 2006) of the TN net taxable estate is exempt from TN inheritance/estate tax. Any net taxable estate above than amount is subject to an inheritance/estate tax calculated on a progressive scale with rates ranging from 5.5% to 9.5%.


So unless the net value of your father's estate exceeds $950,000, its unlikely his estate will be subject to any estate tax. Meanwhile, any gains he incurs as a result of selling the property while he is alive will incur income tax. Thus his heirs are left with the after-tax value of the estate. If he lets you inherit the property, you will receive a step-up in cost basis to its date of death fair market value. This would allow you to sell the property (if you want to) with minimal income tax consequence. Alternatively, your Father may have the ability to gift you the property in question. If properly structured he may gift up to $1,000,000 (or potentially more) before he has to pay any gift tax.


I highly recommend you take your father to see a qualifed CPA or tax attorney who can explain the income and estate tax consequences of what he is doing. He may be costing you more money by selling then he would by letting things alone. Have him spend $500-$1,000 on a consult and it may save the estate thousands.


Do not attempt to sell the property for $1 or undertake any other strategy until you have consulted with a qualified advisor. A sale for $1 is really a gift that may result in a required information return filing (i.e. Form 709) and a gift tax liability. As I indicated above there are numerous ways to accomplishing your Father's wishes while reducing the tax impact (if any) to the minimum necessary.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.


Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: You answered my question assuming their is no surviving spouse. I stated in the question that his wife is still living. Does this change your answer?

Candy
Expert:  Christopher Phelps replied 11 years ago.

Sorry I missed that. Any transfers of assets to your Mother on the death of your Father receive an automatic exemption from any gift or estate tax. Its when the second spouse dies and assets get transferred to the next generation, that the estate tax will come into play.


Accordingly, your Father can leave everything to his wife free of any estate tax at his death. However, I suggest you have your parents see a qualified estate planning attorney to get wills and a living trust in place and funded. If they desire, they can take advantage of planning opportunities that are available with such a trust. Specifically, your Father could leave as much as $1,500,000 ($2,000,000 if he dies in 2006) estate and gift tax free to his children by using his estate tax exemption to fund an irrevocable trust at his death.


This type of planning is normal and done on a daily basis by many people. It also hass the added advantage of avoiding probate and getting assets into heirs hands quicker.


The only change to my answer then is that the estate tax that MAY be due will be deferred until both spouses pass away. Also, get to an attorney and do some planning while you still have the opportunity with both parents alive.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

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