Gifts made in contemplation of death

If this is in a community property state, it may not make much difference. Community property gets full stepped up basis of both spouses' interests when one spouse dies.

Otherwise, your proposal seems sound on the surface, but doesn't pass the smell test. The IRS has several court approved ways of dealing with schemes that appear legal but have no economic substance. If caught, the IRS will unwind the transaction, ignore the gift and deny stepped up basis.

Normally, yes. But it will depend on several factors. First is who paid for the property? If only one of them, even if both are on title as joint tenants, then the payor is treated as the owner for purposes of basis adjustment. So if the person who purchased the property dies, the other owner gets a 100% stepped up basis. If the one who didn't buy the property dies, the other owner gets no stepped up basis.

You have to wait over one year in order for this scheme to work. Eight months will unwind the transaction.

Appreciated property. The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedents death. Your basis in property is the same as the decedents adjusted basis in the property immediately before his her death, rather than its FMV. Appreciated

property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis.

End Quote.

Interesting, I didn't know that. Got a cite/statute?

Is there a statute that allows the IRS to unwind (as you call it) schemes with no economic purpose? How do they define those schemes? If, for example, I win $50k in the lottery in August, but decide not to redeem the ticket until January so that the proceeds are taxes after I retire, I call that "tax planning" even though there is little economic substance for delaying the presentation of the ticket.

Hmmm. I don't live in a community property state, but - One source says that rule applies only if the property was acquired during the marriage.

In doing some further research, the "smell test" is of no importance. 26 USC 1014 (e) disallows the step up in basis if the gift is received within one year of death and ownership reverts back to the donor. Of course the circumvention here is, "Hey Betty, give me those 1000 shares of low-basis Exxon-Mobil and I shall leave them to our son Charlie in my will. I'm changing my will so that you will receive the high-basis Johnson-and-Johnson I bought last week instead of Charlie"

And what is this "smell test" of which you speak. What statute allows this and how is it defined?

In your lottery case, the key term is "constructive receipt.

Try searching for "constructive receipt" lottery and I'm sure you will get lots of hits.

IRC 1014.

Well, I was thinking of 482, but that only applies to income tax.

There are also judicially created doctrines that allow the IRS to adjust transactions they find to be unreasonable. One is called the step transaction doctine. Under this doctrine, when there are a number of legal steps that result in something being done indirectly that can't legitimately be done directly, the IRS has the power to ignore intermediate steps.

Then there is the substance over form doctrine. Under this doctrine the IRS can look at what the transaction actually did rather than the form it took. It can also be used to void what they consider to be abusive transactions.

No, it applies to community property, however and whenever acquired. Whether something is community property or not is based on state law, and the IRS should not normally get involved in determining when something is or isn't community property contrary to what state law says.

Thanks. I hadn't remembered that they'd already thought if this. The "gift in contemplation of death" lookback in other situations is three years, so they're more generous on this kind of transaction.

It's not in the statute - it's a judicially created doctrine, sometimes called the laugh test. Basically it says that if a transaction just doesn't look right to an ordinary, reasonable person, it is proper to give it extra scrutiny and hold it to a higher standard.

Assuming one year did pass (between the giving of the stock to the other spouse and death), then the surviving spouse gets a stepped up basis?

(1) Does this only work if the stock is only separately, not jointly?

(2) Will estate tax have to be paid on the stock?

I assume that estate tax must be paid because the IRS will always get their ounce of blood. Which sort of defeats the purpose of this transferring gimmick.

The estate exemption of $5M (or whatever it is now) can be used and no estate tax needs to be paid on the amount below $5 million. But given the portablity of the lifetime exemption I'm not sure if this transfer gimmick matters. Suppose the FMV of the stock on the date of death is $1M. Then of the $5M estate exemption, $1M is used and $4M is left over to the surviving spouse. Buf if we didn't do any of this transfer stuff, then the surviving spouse gets the full $5M carryover lifetime exemption.

Apparently so. That's what the statute says.

If you give away what you own, you aren't an owner anymore. So you can't be a joint owner. If you are, you don't get a stepped up basis on the part you own.

If it is given to the spouse, it qualifies for the unlimited marital deduction.

When the second spouse dies it will be included in her estate.

If you are in a high enough tax bracket to need to worry about it, you can afford professionals who will set it up in the way that works out best for you.

Constructive receipt occurs when the lottery commission presents you with a check. This will not occur until after the lottery commission confirms that you have a valid winning ticket.

Sorry, but you are talking about actual receipt. Constructive receipt is when you could have reasonably received the check but intentionally chose to take it later. In that situation, the IRS has the right to tax you when you could have received it as opposed to when you actually did.

I own some Exxon stock for which I paid $3400 back in 1984. It's currently worth about $87,000. To re-use your words, I could "reasonably receive a check" for that stock by next Wednesday, if I wanted. Does that make it taxable in 2013??? Of course not.

The same applies to lottery winnings. Winning tickets must be verified by the lottery commission. Disagree? Show me a court case. Thousands of people every year must win in one year but fail to cash the ticket until the following year. Surely, there would court decisions on this issue as taxpayers tried to delay the tax. I can't find one, can you?

And if I don't cash the lottery ticket until July of the following year, is the lottery commission going to issue me a retroactive 1099 with retroactive withholding? Of course not.

Fluff. If your winning lottery ticket hits in July, I cannot see how you can avoid constructive receipt until the following January.

But if it hits December 3o, you have a more powerful argument.

It's worth reviewing this article which was posted to this forum in the past:

That article states that the taxpayer does not have constructive receipt if there are contingencies that must occur before control vests. Since the winner must present the ticket to the lottery commission to be verified, that's a contingency. I can't deposit the lottery ticket into my bank account.

Thousands of mathematically deficient people win the lottery each year yet don't collect the money until the following year. One would think that there would be a plethora of court cases to prove me wrong, but no one has posted one.

I still challenge anyone to show me a court case where anyone who postponed the claiming of a lottery prize until the following year was taxed in the year of the drawing.

The problem is that it is a contingency under the taxpayer's control. A taxpayer is not allowed to intentionally move income from one year to the next. So contingencies that are within the taxpayer's control are not considered contingencies for this purpose.

There have been those cases, and some mentioned here. But I'm not going to do your work for you - this is my profession. So if you'd like to hire me to do that, and pay my regular fee, I'd be happy to oblige.

I'm not going to pay you to search for something I know you'll never find.

Consider this hypothetical situation: On November 10, 2013, Linda buys a Massachusetts scratch lottery ticket. Linda scratches the ticket to reveal that she has won $500,000. Linda's excitement causes so much of a scene that the store security video is shown on the evening TV news.

Linda is due to retire in January so her income in 2014 will be less than 2013. Like 99% of us, Linda is a cash-basis, calendar-year taxpayer. Any event that happens in 2014 will have no effect on her 2013 taxes. Rightly or wrongly, Linda believes that she can postpone/reduce her taxes if she waits to collect the money until 2014.

On January 5, 2014, on her way to the lottery office, Linda is trying to decide whether to take the lump-sum of $320,000 or the annuity option, $50,000 per year for 10 years. While Linda is admiring the lottery ticket, the wind blows the scratch ticket from her hand. The scratch ticket is never recovered.

So, for all you tax experts who believe that constructive receipt happened in 2013 ...

Would Linda's 2013 taxes be based on the lum-sum option or the value of the 1st year payout?

Since no taxes were ever withheld from her winnings, does she have to come up with the whole tax burden herself?

If the ticket had been redeemed, the lottery would have withheld Massachusetts income tax. Would Linda have been able to deduct the Massachusestts tax on her 2013 federal return even though the taxes were withheld in 2014?

Nad, I can't answer your question, but I am amazed how your Aixelsyd doesn't seem to hinder you from reading all kinds of stuff on the Internet.

I am one of America's tax experts, but there is no point in me trying to take and defend a position on this hypothetical situation without a paying client to make it worth my time.

This little hypothetical proves one thing to me--tax codes and laws are too complicated for mere mortals. My guess is you will never find a God who can handle the codes!

From a 2010 American Bar Association paper on winning the lottery by Karen Gerstner, JD. She answers your question.