IRS Asks Court to Release Property Tax Records to Catch Gift Tax Nonfilers

They're going to get lots and lots of records of transfers to and from trusts and from estates. There may be a few gift tax evaders, but I'd guess they are few.

Stu - on my "to write list" I have an article "Bad Estate Planning" in which I describe how my mother did just this, a change of title done by lawyers, transferring her house to my sister. When I asked if she filed form 709 to claim this in her tax return, blank stare followed. It was a small enough value that there would have been no tax due, but of course no step up in basis on Mom's passing. The bottom line for me is that when my sister sells the house there will be a tax bill she should have been able to avoid. So in this case, not so much tax avoidance, but stupidity leading to a potential $20K tax bill.

(Disclaimer - I only agree with Shakespeare regarding lawyers who practice outside of their expertise. If you, lawyer of Mom, don't know anything about estate planning, don't practice it, you messed up big time here.)

you are misreading Shakespeare. Read his ENTIRE quote.

Yes, I've seen lawyers make all kinds of stupid mistakes like that.

In your case, did your mother keep living in the house? If she did, it could be argued that technically it was still part of her taxable estate, thus eligible for stepped up basis.

Mother and sister both live in it. Both are wiling to ignore my good council. I offered the anecdote as an example of bad planning, I don't have the energy to convince them they are going to waste a lot of money. I do my sister's taxes, and when Mom passes, I'm going to have a tough decision to make.

It's not as bad as it seems. If your mother still lives there (or could) when she dies, §2036 says,

"The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money?s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death?

"(1) the possession or enjoyment of, or the right to the income from, the property, or

"(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom."

Then under §1014 says that a recipient gets a stepped up basis

"if by reason thereof the property is required to be included in determining the value of the decedent?s gross estate under chapter

It was not the smartest thing to do, but it doesn't have to be a problem, either.

I'll be saving this. This is great news. Which is why I like knowing lawyers who actually know their stuff. Much appreciated.

Let's say this has occurred, and at the time of the transfer the proper tax forms were filed, either using up a portion of the gift tax allowance, or using it all up and a payment for gift tax was made.

Upon death, if the house is included in the gross estate, does the portion of the gift tax allowance that was used get "unused"? Is there and estate tax credit for the gift tax paid?