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The value of gift of a partial interest in an asset will, in most cases, be less than the specific percentage times the full fair market value. Gifted assets can have discounts due to lack of marketabilty, control, etc. The donor would need to have an appraisal done advising the appraiser of the interests to be gifted.
The recipients' basis would still be the donor's original cost plus any improvements times the percentage interest received.
So glad you answered. You have quite a bit of experience. Maybe you can elaborate on this. If the man gave the $300,000 vacation home to his 3 sons, but it was encumbered by a life estate which was given to his 2nd wife in the same deed, how would that affect the value of the gift for tax calculations? For example if according to applicable tables for the wife's age, the life estate interest was worth 70% of the total value and the remainder interest was worth 30%, then the wife's gift would be $210,000 and the sons would be $30,000 or $10,000 each. If this gift was made before the life estate would qualify as a marital deduction.... as a QTIP, like before the mid 1980's, then would all 4 gifts be discounted for gift tax since the title would be so tied up? Would the life estate make the gift value even less than before when title went to 3 sons only? Worth bonus.
The life estate would not receive any further discount as the spouse has sole possession for her lifetime. The value of her gift is the 70% of the $300K or $210K. The sons' value starts at $30K EACH and then an appropriate discount would be taken. Assuming the spouse's gift did not qualify for a marital deduction, the total gift in this second scenario would be higher. For example, assume the total discount for lack of control/marketablity was 15%. In your first case, the gift to each son would be $85K for total gifts of $255K. The second scenario would have the life estate valued at $210K and each son's interest valued at $25.5K, total gifts of $286.5K.
Thanks for the accept and the bonus! Funny you should mention that, I was a bust as a college instructor, too much time commitment. However, over the years I have mentored many staff members in a one to one setting.
I hope you are still out there. I asked a question about a man who owned a vacation home with a fair market value of $300,000 and he deeded it as a gift to his 3 sons together. If the man purchased the home 10 years ago for $75,000 but the year he gave it away, it was worth $300,000, then is his gift tax based on the $75,000 value or on the $300,000 value? I assumed it was based on the current $300,000 amount, but someone made me think it was based on the $75,000 purchase price. If the gift tax or unified credit calculation uses the $300,000 amount but when the sons sale the property, they have to go back to his $75,000 basis for capital gains tax, looks like they are getting taxed twice on the dollars between 75,000 and 300,000.
Dear hotdog -
The gift tax is based on the $300,000 amount. The basis for purposes of sale (and income tax) is $75,000.
Hypothetical: Son needs $300K. Dad will make gift to son. He can gift cash or property. (Property value $300K, basis $75K, tax due if sold $35K)
1. Dad chooses to gift cash, but needs to sell the property to obtain enough cash. He sells the property, reports the gain, pays the tax, makes the gift and utilizes $300K in unified credit, but his estate has declined by $335K ($300K real estate and $35K in taxes). Son ends up with $300K.
2. Now assume he gifts the property and the additional cash son will need if son sells the property. The dad utilizes $335K of unified credit, the recipient pays $35K in tax and has $300K in cash.
Dad's overall position is the same. His estate has declined by $335K. Son is in an equal position.
Yes I see your two replies.
I looked at the attorney's answer and concur. The estate has been closed for IRS purposes. They had their opportunity for fact finding and assessment. The statute of limitations has run. As an aside, because of the possible omission, the gain on the sale will be higher because the basis is understated.
Even if the statute were open and the IRS wanted to assess, the assessment would be issued to the granddaughters, not the property. Failure to pay could cause a levy on any property currently held by them, regardless of what property the assessment related to.
I will reply then accept with the bonus. If there was other property in the uncle's estate left to a son, looks like it would be accountable to the IRS before property owned by the two daughters outside the estate, like property received by them from a grandfather or fruits of their own labor. Any thought on that? Also if the statute were open and the IRS wanted to assess, would there be interest and penalties added? Would the tax due be considerably more than it would have originally been? Perhaps double. Thanks again.
This is all hypothetical, as the period is closed.
All residuary beneficiaries of the estate would be assessed. Initially the assessment would be allocated based on each beneficiary's residuary percentage. If the IRS were unable to collect from one, it is possible that they would attempt collection from the others. The maximum amount that the IRS could collect would be the lesser of the total value of the assets in the residuary bequests or the additional tax due plus interest and penalties. For example if the assets received equaled $10,000 and the tax plus interest and penalties totaled $12,000, the maximum collection would be $10,000.
Even if the daughter's had disposed of the real estate immediately after receipt, their other assets could be attached as the proceeds could be in cash or other investments currently held.
The tax itself would be at the incremental amount from the original estate value. However, with 50 years of penalties and interest it is likely that the amounts due would be triple, quadruple or more than the original tax amount.