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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22704
Experience:  Taxes, Immigration, Labor Relations
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How to properly report a life estate deed on Form 3520 ? I

Resolved Question:

How to properly report a life estate deed on Form 3520 ?

I am a US resident and remainderman of a foreign life estate deed where the property
is located outside the US and the life tenant is a Non US citizen/resident.

At the time of the deed there is a gift of remainder interest and therefore Form 3520
needs to be filed and the remainder % of FMV at of gift at the time gets reported.

What gets reported when life tenant passes away and the remainderman owns the
property outright ? Full FMV at time of death just like a regular inheritence ?

I don`t want to risk getting penalized for filing Form 3520 inaccurately.....

Thank you
Submitted: 1 year ago.
Category: Tax
Expert:  Thomas McJD replied 1 year ago.

TMcJD :

Hello. I will be happy to assist you. Was this gift from a person and NOT a trust, partnership or corporation? What is the fair market value of the remainder interest at the time the gift was made?

Customer:

It was from my father to me. He owned the property outright than it was split

Customer:

between remainder and usufrutuary

TMcJD :

Okay. And what is the FMV at the time of transfer of the remainder interest to you? What is the value of the remainder interest?

Customer:

I don`t understand your question. I know how to calculate the interest from a table

Customer:

but what do I need to report once my father passes ?

TMcJD :

When he passes away, you don't need to report anything. The only thing the 3520 is concerned with is that you received a gift from a foreign person and whether the value of that gift is worth more than $100,000, in which case you provide further details concerning the gift. When he dies, there's nothing to report because there's no taxable event - he won't pay any US estate tax or have to file a US estate tax return if he is not a citizen or resident alient.

Customer:

Is there a step up in basis of the property ?

TMcJD :

In determining whether the value of the gift is worth more than $100,000, you don't use the full value of the property -- only what the remainder interest is worth. His life estate has value. The full value minus the life estate value is what the remainder value is.

TMcJD :

Whether there are capital gain tax consequences or a step up in basis depends on the laws of the country where the property is located - not US law.

Customer:

When I sell the property I have to report it since I am a US resident.

Customer:

What basis do I use to determine that basis ?

TMcJD :

Yes, sorry for any confusion. For the portion that is taxed in the US, there would generally be a step up in basis at the time of death so that no US capital gains would be paid.

TMcJD :

That would be the value of the property at the time of death.

Customer:

Are you sure about that because I was told this :

Customer:

Actually, the fact that your father is not a US person is likely determinative to this question. IRC 1014(b)(9) gives the step-up in basis only if the property must be included in the decedent’s estate for US estate tax purposes. The Internal Revenue Code has two separate chapters that deal with when property is included in the gross estate. One chapter addresses residents and citizens, and the other addresses nonresidents who are noncitizens. In that chapter is IRC 2103 – which states that “the value of the gross estate of every decedent nonresident not a citizen of the United Stated shall be that part of his gross estate (Determined as provided in section 2031) which at the time of his death is situated in the United States.”


 


Accordingly, because your father is a nonresident noncitizen, and because the property is not situated in the US, the property will not be included in his gross estate for US tax purposes, and therefore it will not meet the requirement of IRC 1014(b)(9).

Customer:

you said:



That would be the value of the property at the time of death.


TMcJD :

http://hodgen.com/basis-step-up-on-assets-inherited-from-nonresident/

Customer:

Does the FMV at time of death need to be reported on 3520 ?

TMcJD :

No, the value of the remainder interest, not the full value of the property.

TMcJD :

But that's only if the value exceeds $100,000

Customer:

So if I inherited a house that is worth 400,000 I need to report that on Form 3520.

Customer:

If I receive a remainder interest I only report that if more than 100,000.

TMcJD :

No, 3520 is for gifts. Inheritance is not reported on 3520. But if the gift were from a foreign person and exceeded $100,000, then yes you would report it. You report any gift. However, if you check the "no" box on the form re value being over $100,000, then you don't provide further details. If you check "yes" it is over $100,000, then you provide further details. So, yes, in your case if the value of the remainder interest is greater than $100,000 you check "yes" and then provide the details.

TMcJD :

If it's less than $100,000, you still file the form but check "no" that because it's not greater than $100,000

Customer:

When I inherit foreign real estate from my Non Us resident father I do not report that on 3520 ?

TMcJD :

As noted above, no. You do not report inheritance on 3520.

Customer:

How do you report foreign inheritence from NON US person ?

TMcJD :

You do not. Inheritance is not a taxable event in the US unless included in a person's US gross estate. If you're not a US citizen and have no property in the US, you have no US gross estate for estate tax purposes.

TMcJD :

Further, inheriting property is not an income tax event.

Customer:

When I sell a foreign property and I need to report capital gain or loss on Form 1040

Customer:

You posted a link regarding the step up.

Customer:

I have a problem understaning that in plain English it is jargon to me.

TMcJD :

About the 3520 and inheritance - let me clarify. You might file the form for inheritance if you did receive a bequest. However, you will not receive a bequest of the property on your father's death because he already gave it to you and reserved a life estate, so there is no inheritance on his death. You already own everything you'll ever have. His interest simply ceases to exist on his death.

Customer:

Can you explain in simple words why a US resident remainderman gets a step up

Customer:

on a property that is located outside the US when the NON US life tenant passes

Customer:

when the property is not part of an US estate ?

TMcJD :

I don't think I can make it any simpler since it is such a complex matter. I'll opt out and allow another expert to assist you if they can. You are not being charged for my time and do not need to rate any answer until another expert steps in to assist you. At that time, you can rate that expert's answer. Thanks and have a good night.

Customer:

So the basis is the FMV at time of death of the Non US life tenant of the not in the US located property
even though the property is not part of any US estate and there is no Form 3520 to be filed because
it is an inheritance.

Customer:

How than is the FMV at time of death recorded ?

Customer:

No 3520 for a foreign inheritance over 100K ?

Customer:

I find that hard to believe .

Expert:  Lev replied 1 year ago.
Hi and welcome to Just Answer!
Please allow to assist.
So far - you separately need to report both - the fact of receiving a gift from a nonresident alien - and the fact of receiving inheritance.
How to determine the value of the gift in case of life estate?
Section 7520 of the Internal Revenue Code requires the use actuarial tables for valuing life estates and remainders.
Publication 1457 provides examples.
In your case - the interest rate in June 2013 is 1.2% - see here - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-7520-Interest-Rates
and Table S (1.2) shows that the factor for a life estate - for instance for a 79-year-old person is 0.09888 and a remainder interest is 0.90112 - http://www.irs.gov/file_source/pub/irs-tege/sec_1_table_s_2009.xls
So - assuming the value of the property is $1,000,000 - for gift tax purposes - the value of the gift is $100,000 x 0.90112 = $901,120.
That value is reported as a gift on the form 3520.

The next step would be to report the value of the inheritance. For that purposes you report the total value of the property.
You might confused that you actually report some of the value twice. However please be aware that you are reporting different transactions - the gift and the inheritance - so that is not double reporting.
None of these reporting affect your tax liability and none are included into taxable income.
Customer: replied 1 year ago.

The problem I have is the inheritance.


With life estate and passing of the
life tenant the life estate interest at time of death is zero.
There is no official transaction although only at that point does the
remainderman have full rights and FMV to the property.


 


Has anyone ever filed a 3520 reporting a dissolved life estate as an


inheritance with full FMV at time of death even though it was not part


of an US estate ?


 


I am looking for someone that has actually done this. This situation
must occur more often especially in a counrty that has a lot of immigrants.

Were my father a US Person or the Property in the US it would become
part of a US estate and be stepped up because it is taxable
but it is not.
In the country the Life estate was set up the FMV at time of the gift
becomes the basis of the property for the remainderman.
In the US apparently donors basis becomes donees basis with gifts.

Another perspective is that the basis should be determined
by the country were the conditions of the life estate deed was written
and the property is located.
It would than be the FMV gift tax was paid on by the remainderman.

Expert:  Lev replied 1 year ago.
Has anyone ever filed a 3520 reporting a dissolved life estate as an inheritance with full FMV at time of death even though it was not part of an US estate ?
I personally had experience with filing form 3520 for inheritance received by US residents from nonresident aliens.
I never had the situation specifically related with life estate in a foreign property. However - there should not be any difference.

In the US apparently donors basis becomes donee's basis with gifts.
In the US the basis of the gifted property is the lesser of the property's fair market value at the time of gifting or the donor's basis. That basis should be used if you sell the property in which your father owns the life estate.
If you do not sell the property till your father's death - the property would be considered as inherited - and different rules for determining the basis are used.
Customer: replied 1 year ago.


I"f you do not sell the property till your father's death - the property would be considered as inherited - and different rules for determining the basis are used."


 


How can I be sure that this applies to my situation ?
You saw what my tax attorney wrote.


Expert:  Lev replied 1 year ago.
I do not agree with your tax attorney and provided supporting documents that the IRS takes a different position.
You may provide the information to your attorney for considerations or if you do not feel confident working with that attorney - you may consult with a different attorney.

You may confirm IRS's position by contacting the IRS directly _1_800_829_1040_ please be prepared to wait.

If a large amount is on stake - and you want to be absolutely sure about IRS's position specifically related to your situation - you may request a Private Letter Ruling from the IRS.
PLR - Private Letter Ruling is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer’s represented set of facts. A PLR is issued in response to a written request submitted by a taxpayer.
Revenue Procedure 2011-1 sets forth the issues on which taxpayers may request PLRs and the circumstances under which the IRS does not issue PLRs. It also provides instructions on what documents and information are to be provided as well as on procedural requirements.
The procedures and user fees for obtaining a letter ruling are published annually in the first revenue procedure of each calendar year. The current procedures are in Revenue Procedure 2013-1 which can be found in Internal Revenue Bulletin 2013-1 - www.irs.gov/pub/irs-irbs/irb13-01.pdf

A request for a letter ruling including the applicable user fee should be sent to: XXXXX XXXXX Service Attn.: CC PA:LPD:DRU P.O. Box 7604 Ben Franklin Station Washington, DC 20044

Please be aware that might be complicated procedure and could take long time. Any local CPA may help you to prepare PLR request.
Customer: replied 1 year ago.

"I do not agree with your tax attorney and provided supporting documents that the IRS takes a different position.
You may provide the information to your attorney for considerations or if you do not feel confident working with that attorney - you may consult with a different attorney."


Lev,

 

this all very overwhelming to me and I am kind of lost.

Could I beg you to please provide
the supporting information again that I can show my attorney.
We can start a new thread or whatever it takes , you are my only

hope in supporting that position.

 

Thank you

 

 

PS.: When there is an inheritance what date gets put on 3520 , date of death or
actually receiving the inheritance (entering in titlebook)

Expert:  Lev replied 1 year ago.
No issues - I will re-post the information - that is based on my own research:

See this article - http://www.nysscpa.org/cpajournal/2001/0900/features/f093201.htm
Scroll down to Transfers upon Death:
Although non-U.S. assets held by a non-U.S. citizen nonresident are exempt from U.S. estate tax, there remain issues concerning the basis of the property and the application of IRC section 684 to the transfer of these assets. Under a longstanding revenue ruling, all assets held by a non-U.S. resident at death receive a step-up in basis under IRC section 1014, including property not subject to U.S. estate tax. Under sections 1014(b)(1)–(4), the stepped-up basis applies to all assets owned by the nonresident directly, through a revocable trust, or through a trust in which the nonresident possessed a general power of appointment exercised by will.
So far - that article contradicts position taken by your attorney. While your attorney made a valid point - I feel that is very conservative position and even the IRS doesn't take such position.
I were looking for the "longstanding revenue ruling" mentioned above - and that is Rev. Rul. 84-139 - see for instance here - http://www.charitableplanning.com/document/670319

One may argue that is a very old document - but what we see - in this Private Letter Ruling - http://www.irs.gov/pub/irs-wd/1245006.pdf - which is dated by 2012 the IRS referenced Rev. Rul. 84-139 - so we may conclude - it is still in effect. Here is an extract :
In this case, Taxpayer’s issue will acquire, by bequest, devise, or inheritance, assets from Trust at Taxpayer’s death. The assets acquired from Trust are within the description of property acquired from a decedent under § 1014(b)(1). Therefore, Trust will receive a step-up in basis in Trust assets under § 1014(a) determined by the fair market value of the property on the date of Taxpayer’s death. See Rev. Rul. 84-139, 1984-2 C.B. 168 (holding that foreign real property that is inherited by a U.S. citizen from a nonresident alien will receive a step-up in basis under § 1014(a)(1) and 1014(b)(1)). This rule applies to property located outside the United States, as well as to property located inside the United States.

So far - what we see the IRS's position - at least that was taken in 2012 - contradicts with whatever you were told by the attorney.
I hope that clarifies your situation.
Customer: replied 1 year ago.


.....and this applies to my foreign life estate situation ?

Expert:  Lev replied 1 year ago.
The foreign real property that is inherited by a US citizen from a nonresident alien does receive a step-up in basis under § 1014(a)(1) and 1014(b)(1)). This rule applies to property located outside the US, as well as to property located inside the US. That is the position held by the IRS
So far - the argument your attorney made - that the property doesn't receive a step-up in basis because a nonresident alien is not subject of estate taxes on the property located outside the US contradicts with above stated IRS's position.
There is no special treatment or exclusion for the life estate related to the foreign property. That position is related to ANY property.
I feel that your attorney overreacting and took too conservative position.

A treatment of the property with the life estate provision depends on whether the property is included into the estate under the US law. According to IRC section 2036 - the full value of the property in the retained life estate - is subject of inclusion into decedent's gross estate - and as such the property is considered as inherited and will get a stepped up basis.

These are arguments based on referenced statutes and position taken by the IRS.
However - if you want to obtain the IRS's position specifically represented set of facts related to your situation- that may be done via PLR request.
Customer: replied 1 year ago.


Can I hire you......

Expert:  Lev replied 1 year ago.
I would be glad to help you...
However rules on this site prevent me from contacting customers outside the site...
Also - as you might noticed - posts on Just Answer are for general information, and are not intended to substitute for informed professional advice and do not establish a professional-client relationship.
In additional - if you are looking for a tax attorney - you need someone who holds license in YOUR state.
Sorry if you expected differently.
Nevertheless - I would be glad to address all your tax related questions.
Customer: replied 1 year ago.

Ok , what is the easiest way to stay in touch with you and how does one
find a good tax attorney ?


With complex issues like this the attorney I currently have would cost me thousands $ without getting anywhere.
He will charge me his time plus the time for any help he needs from
their estate planning dept. just for research. I need somone that has


experience . Paying for research is a bit like learning on the job....


in this case.


 

Expert:  Lev replied 1 year ago.
There are several issues...
1. How to choose an attorney?
When you have a case - you may interview several attorneys and choose the one you like. Most attorneys provide first evaluation interview with no charge or charge a nominal fee.
You may use referral service in your state to choose an attorney.
As you are in New York - here is an information about New York State Bar Association Lawyer Referral and Information Service - http://www.nysba.org/AM/Template.cfm?Section=Need_To_Hire_A_Lawyer_
Here is the New York City Bar Legal Referral Service - http://www.nycbar.org/get-legal-help/legal-referral-service

2. Do you really need an attorney?
We all know that attorney services are expensive. However in most situations you need a tax attorney when your case is going into the tax court. Attorneys rare prepare tax returns or simple documents.
Based on your information - all you need - prepare form 3520 - and any local CPA may help you.
Even if you want to request a PLR - you do not need an attorney.

3. How to contact me in future?
I am on this site almost daily - you may post your question directly for me - and start your question with something like "For LEV..."
Please be sure the question is raised in the Tax category.
I might be not immediately available but surely will reply.
Please be aware that most experts on this site are very knowledgeable and you might want to consider others as well.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22704
Experience: Taxes, Immigration, Labor Relations
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