Her house was owned by the "Family Trust" and sold in June 2010. She lived in that house (and only that house), for over 60 years.
I don't recall the technical term, but this Trust had been set up so that the house was NOT a part of the estate, and the basis is the appraised value from the time of my Dad's passing in 1998.
Profits and losses pass through to the beneficiaries.
Is the gain taxable? (It's about $75K)
If so, will it be taxed at the LTCG rate for the individual beneficiaries? Or at some other rate?
the bypas trust for the benefit of the children when father died in
1998, hene its "basis" as FMV in 1998 and was not to be part of her estate. So, monther didn't own it the sales proceeds belong to the childrens bypass trust and the gain from 1998 is taxable as a long term capital gain to that trust----That is, no "step-up"of basis, and no $250K exemption.
since she continued to live in the house, did she not reserve rights to the house, perhaps a life estate? If so, doesn't IRC 20368 apply?
Internal Revenue Code § 20368 provides that "the gross estate shall include the value of all property" in which the decedent retained for life or "for any period which does not in fact end before his death . . . the possession or enjoyment of, or the right to the income from, the property" or "the right . . . to designate the persons who shall possess or enjoy the property."
It's not normally considered a life estate, but I suppose it could be. The trust was the owner, and she had the right to all income from the trust. In this case it was the ability to live there, a sort of in-kind rent.
You have missed this provision of 2036(a):
"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...."
Look particularly at those last six words. Assuming she had a life estate, it was so because it was given to her, not because she had full ownership and gave away a remainder interest. As a result, §
2056 takes precedence over §2036.
The rule is set up so that, if you own the whole thing and continue to use it for the rest of your life, you can't reduce your taxable estate by just giving it away on paper. That has no relevance to Ron's situation.
thanks - this is a learning item for me. Are you saying since husband and wife created the trust, it was not wife alone that made the deal, and thus section 20368 does not apply? Or does it apply to one half of the home, assuming the wife owned one half along with her husband's ownersip of half?
Ah, yes. "Bypass trust" was what I couldn't recall.
Your response is what I had initially assumed. But as I got to reading through the IRS Publications, I got confused and thought it prudent to check. I also confused myself with a recollection that some real estate gain, even when held long-term, can be taxed at a higher rate than the LTCG rate.
You've cleared up my questions about these issues.
The wife only owned half of the house, and she traded that away for something of equal value, so her taxable estate stayed the same. If there was no reduction in the size of her estate, section 2036 does not apply.
Section 2036 (there is no 20368), and also the provisions of sections
2035 through 2043, are there to prevent people from trying to improperly reduce their estates by giving away property and not getting something of equal value in return. Since that didn't happen in Ron's case, there is no problem.
I'm a bit lost here. I'm not sure of Ron's case, but assuming a wife and husband create a living trust. The husband dies. The wife continues to live in the house.
Hasn't the wife retained the right to use her half, which she put in the trust? So, her half of the house remains in her estate for estate tax purposes, right? And, if so, can she claim the $250k exclusion upon its sale?
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...." Her extent was one half of the house.
No. The husband's trustee was given the power to look at all the property owned by both spouses, and put property equal to half the total value in each spouse's trust. In this case, apparently, the entire house was put into the husband's trust, while other property of equal value was put into the wife's trust.
Actually no, because at that point she wasn't the owner. The trust was the owner. And the trust, being a fictitious entity, could not reside in the house.
It's generally problematic to put the surviving spouse's residence in the decedent's trust, just for this reason. It makes it more expensive for the surviving spouse to sell the house if she wants to downsize or move to another place.
Section 2036(a) says that it applies, "except in case of a bona fide sale for an adequate and full consideration in money or money?s worth...."
It means a transfer to the exten fair market value was not received in exchange. You make a transfer every time you go to the grocery, but you don't have to include everything you've ever paid for food in your taxable estate.
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