turfing inheritance to children who will pay less capital gains tax?

The son can gift his children $12,000/yr with no gift tax consequence, or, he can use up part of his $1M lifetime unified credit. If he's married, the $12K doubles to $24K.

The transaction is a gift the way you describe it. JOE

The basic answer is "no," but I'm having trouble seeing the problem, either with getting the money where he wants it or making sure Sisterwoman doesn't stiff him (from the unquoted part).

Why is there concern about tax brackets? This is an inheritance, which is not taxable income. Why is there concern about the sister's actions? Isn't there an executor?

A little clearer explanation of the situation, including some dates might help.

Inheritance is not taxable.

Inheritance has a stepped up basis to the time that it was inherited... given that, where is the capital gain? Or at least, the capital gain isn't that huge.

He can gift his grown daughters with $12,000 each annually without gift tax, $24,000 if he is married.

Property owner died 9 years ago, but property still in his name. Property has doubled in value. 50% of what is coming will have capital gains.

Executor is sister, who has broken more than one state law about her role as such. Some families are unwilling to go after a family member in court. Sister now wants property all in her name (assessed value is going up 24% for 2008) and wants to write IOUs (interest-free) for "five to ten years down the line". We want our money now. The posturing has begun.

I file this under "inlaws".

The property may actually still be in his name, but it technically belongs to the Estate of (his name), and when sold will generate taxable income to the estate.

At this point however, and in view of this added information regarding possible family dissension, you need to engage an attorney versed in estate matters.

ChEAr$, Harlan Lunsford, EA n LA

Actually there is. It's called a qualified disclaimer. It's probably too late in your case, since it has to be done within nine months of when the original beneficiary inherits the property. Even if the property is still in the decedent's name nine years later, that doesn't extend the time.

As a result, as someone else noted, the only other way to do it without tax consequences is for the son to give an interest worth $12,000 each year to his daughters. A yearly appraisal will be required to do that. If the son is married, he and his wife can file a gift tax return, elect to split the gift, and as a result give double the amount, as it is treated as coming half from each spouse.

Or he could sell it to them now, and take back a note that called for annual payments of $12,000 (each) or less. The one drawback to this approach is that interest is required to be charged. So either the son will have to recognize taxable income in the amount of interest he could have but didn't receive, or the kids will have to recognize the interest as cancellation of debt income.

How about just using a mortgage?

Stu

OK, but won't that raise a GST issue? (I don't deal with GST issues and refer them out.)

I don't think so. First of all if there were enough money to justify worrying about the GST, they should spend the money to hire a tax lawyer to figure it out.

But the GST deals with gifts. I was proposing that, if he didn't qualify for a qualified disclaimer (which would implicate the GST) the son should sell the property to his children, and forgive the loan payments each year. If the father sells it to the children, taking back a mortgage to be sure the transaction goes the way it is supposed to, it shouldn't be considered a gift.

Stu

If the mortgage involves below market interest, the foregone interest counts as a gift. Whether or not there is gift tax depends on the total amount of gift money.

Una

If I am reading the original post correctly, the primary reason for transferring the inheritance to the grown granddaughters was to pay less in taxes. But will you really? We are talking capital gains, not OIT. Do the granddaughters have so little income they qualify for the

5% rate? If so, how much of the gain will be at 5% and how much will be bumped up to 15% (IOW, is it worth the trouble)?

All the good adivce in the world is limited in usefulness if the other party isn't playing by the same set of rules. Your account of the executor's past actions suggest she doesn't care what is right and wrong. If she's going to do what she wants anyway, what does it matter what the law says? Unless your son is willing to get screwed in the name of "keeping the peace", I would suggest he run immediately to a lawyer.

Wouldn't any capital gains accrued before the estate settles be taxed in the estate? Ie, not capital gains to any beneficiaries of the estate?

It sounds like the family is going to have to go to court, or allow the executor (sister) to continue holding the estate hostage, extorting its assets from the rest of the family.

Una

Not in this case. The basis of inherited property is increased to the value at the donor's date of death. In this case he apparently died nine years ago, so the increase in value over the last nine years would be taxable capital gain.

That happens sometimes. Money is thicker than blood.

Stu