Estate planning for the
succession to family properties requires careful consideration of a number of
complicated, and sometimes conflicting, tax laws. In this Analysis, Nancy G.
Henderson discusses primary tax considerations in estate planning for family
homes. She writes:
A significant assumption for
purposes of this article is that there are federal estate and generation-skipping
transfer (GST) taxes.
A. Federal Estate Tax. For most clients, the primary impediment to a
successful transfer of a valuable family home to children and grandchildren is
the federal estate tax. The federal estate tax is imposed upon the cumulative
fair market value of all of a decedent's assets held at death. Important in the
context of planning for family homes is that, included in the decedent's
taxable estate are not only assets legally owned by the decedent at the time of
death, but also assets which the decedent may have given away from a state
property law perspective, but over which the decedent held impermissible
"strings attached" for federal estate tax purposes. Such
"impermissible strings" include the right to retained use or
enjoyment of transferred property without adequate consideration to the donee,
the right to receive the income generated from transferred property, or the
right to control the donees' beneficial interests in transferred property in a
manner that is not limited to a reasonably definite standard. The decedent's
taxable estate will also include assets transferred by others over which the
decedent held a general power of appointment exercisable during life or upon
. . . .
C. Gift Tax. The second most important tax imposed in
connection with succession planning for family homes is the federal gift tax.
Under current federal tax law, lifetime transfers of real property made out of
detached and disinterested generosity (other than a transfer for full and
adequate consideration in money or money's worth) will give rise to a federal
gift tax unless a transfer qualifies for certain statutory exclusions or
deductions. Among the available deductions are the unlimited gift tax marital
deduction for transfers to U.S. citizen spouses and the unlimited gift tax
charitable deduction for transfers to qualified charitable organizations. Also
excluded from gift taxation are gifts of present interests in property,
provided that the cumulative amount of all such gifts from one donor to one
donee in any one calendar year does not exceed the amount of the gift tax
annual exclusion, which is presently $13,000. Once a donor's cumulative gifts
to a donee exceed the gift tax annual exclusion, the donor must begin to
consume his or her lifetime applicable exclusion from gift tax, which presently
shelters from gift taxation the first $1,000,000 of such otherwise taxable
gifts. To keep the Internal Revenue Service apprised of the use of the donor's
gift tax applicable exclusion, a gift tax return is required to be filed for
any calendar year in which the donor makes gifts to which the applicable
exclusion will apply.
E. Income and Capital Gains Tax. Transfers of real property present
challenging income and capital gains tax considerations as well. While a
lengthy discussion of these taxes is outside the scope of this article, there
are certain income and capital gains tax issues that bear particular mention.
First, family properties are
often held for a long period of time and may therefore be highly appreciated.
As a result, any strategy that contemplates intervivos gifts must balance the
estate tax savings of the strategy against the loss of the basis step-up that
would have been achieved had the property been held until the death of the
owner. Further, any strategy that contemplates a sale of the property, other
than to a sale to a defective grantor trust or a sale taking place during
post-mortem administration (when the property has secured as new tax basis),
will generate capital gains taxes and possibly the recapture of certain income
tax deductions taken by the seller if the property was at any time held for the
production of rental income.
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