"Simba327" <googlegroups[at]smithfinancials.com> wrote:

- quote -


They will have to file a gift tax return & can elect gift
spliiting

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] > > -----> real address on hobokeni or hobokenx <-----

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First, you really need to sit down with an attorney who has
experience in trusts and estates and in estate planning; the
stakes here are just too large - the gift tax rate for 2006
is 46%, or about $46,000 based on the amount your parents
intend to invest; if you make a mistake and don't report
properly, the penalties on top of that will kill you.

The reason you need to sit down with a trusts & estates
attorney is two-fold. First, depending on how the addition
is constructed and the degree to which it functions as a
separate dwelling space, it is possible that your parents
would be treated as having retained a life estate in the
addition that they paid for, and as having made a gift to
you of a remainder interest. The fact that they may not
have a legal interest in the property in the sense of being
on the deed is not determinative of their interests for
federal tax purposes - because they will have the use of the
addition for their lives, they will "own" the beneficial
interest in the addition regardless of whether they're on
the deed or not.

Depending on the facts, in these circumstances, it is quite
possible that the net present value of the remainder
interest in the addition, rather than the $100,000 cost to
build it, would be treated as a taxable gift in 2006. In
addition, because of the retained life estate (on my
hypothesis), the fair market value of the addition on the
date of their deaths (which might be substantially higher
than the cost to build it today) would be included in their
estates for federal estate tax purposes (the prior gift tax
would, however, be taken into account). Lastly, if I
remember correctly (please don't take my word for it -
that's why I want you to see an attorney - gifts of
remainder interests do not qualify for the annual gift tax
exclusion amount (the $12,000 you referred to), which means
that, if the IRS determines that your parents have made a
gift of a remainder interest to you, that the full amount
will constitute a gift potentially subject to the gift tax.

There will almost certainly be some sort of gift tax imposed
when the addition is built because, notwithstanding the
retained life estate I described above (assuming the IRS
decides that such a life estate was retained), a result
which is usually inconsistent with the idea of a completed
gift, there is no doubt that you will ultimately receive the
remainder interest, and thus a gift of some sort is most
likely to be held to have ocurred when the addition is
built. However, it is possible that, with the right
planning, even that result can be altered.

The second reason why you should see an attorney is that
there may be ways to structure the transaction in such a way
that any taxes are minimized. For example, depending on the
anticipated size of your parents' estates, they may not
expect to use up all of their estate tax exemption amount at
death, in which case it may be possible to plan the gift in
such a way that the exemption is used to cover the gift.
This could be particularly important if their estates are
expected to be sufficiently large that the estate exemption
amount won't cover the entire $100,000 - in that case, it
might be possible to plan in such a way that the full
$100,000 is structured as a gift this year that uses a
portion of the estate exemption amount, and additional gifts
in the future are planned (using the annual gift exclusion)
so that the estate left at their deaths is small enough to
be covered by the remaining estate exemption amount.

Finally, it might be possible to structure the transaction
in the form of a land lease between you and them, with
permission to build the addition, and with possession of the
addition reverting to you as landlord apon termination of
the lease, or with a fractional interest in the legal title
to the addition passing each year as the rent due on the
ground lease. Because this would be a lease between related
parties, it would be subject to a lot of scrutiny by the
IRS, which will be looking very hard for any sort of
disguised attempt to make a gift. Under this variation on
the transaction, your parents would have to pay, in some
form, rent that is commercially reasonable under the facts
and circumstances. As a consequence, you and your wife will
have rental income each year that you would have to report
and pay tax on; however, depending on your tax bracket and
the size of your parents' anticipated estates, the tax on
such rent income might be less than the gift/estate tax that
would otherwise apply. You might also be able to take some
sort of depreciation deduction on your fractional interests
in the addition; however, this would be heavily dependent
on, among other factors, the degree to which you structured
the arrangement in a business-like manner with the intent to
make a profit. While you might be taken aback by the
suggestion that you profit from your parents, you really
shouldn't be; the fact of the matter is that, by getting the
addition free and clear upon your parents' death, you will
be profiting from them one way or another and, in fact, your
parents probably want you to profit from them, which is just
another way of saying that they want to leave you something
other than just nice memories and fading photographs. Since
you'll be profiting from them one way or another, the only
question is structuring it in such a way that you're not
impoverishing them during their lifetimes, and minimizing
the tax impact to them and to yourselves.

Please do not take what I've said above as the gospel truth.
I'm writing off the top of my head, based on what I think I
remember about gift and estate taxation, and without doing
any extensive research; as a result I might have gotten
something wrong. Nonetheless, I hope that I have managed to
convince you that there is a lot at stake here, that even
simply reporting the full $100,000 as a gift in 2006 may not
be the correct tax treatment and may result in a lot of
interest and penalties being imposed, and that spending
$1,000 to $1,500 to get some good advice from an estate
planning attorney could be more than offset by the tax
savings such planning might provide - ultimately, only fools
are penny-wise and pound-foolish.

Good luck.

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Simba327 wrote:

- quote -

Yes and yes. If the gifts are given over two tax years,`the
total excluded could be as much as $96K. Gift Tax returns
(form 709) would still be necessary, but I doubt if any tax
would be due until they die.

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"Simba327" <googlegroups[at]smithfinancials.com> wrote:

- quote -

Yes, they should file a gift tax return. They can exclude
$48,000 as you suggest.

Or they could give you $48,000 in 2006 and another $48,000
in 2007. The remaining $4,000 can be a loan that they can
forgive in 2008.

Stu

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googlegroups[at]smithfinancials.com (Simba327) posted:

- quote -

You're on the right track. They could "loan" you the entire
amount needed for "their" addition, _less_ the first $48,000
-- which they could give you and your wife this year. Then,
the next year, they could give you both the same gift. If
the total came to $96,000, that would make it all yours --
with no strings attached.

If you and your parents decide to do this, be sure to
execute a formal loan agreement for the balance, and pay
"interest" at a competitive rate (at least 6%) until the
loan is completely forgiven.

But the filing of the "gift tax" report is really no big
deal, since it only represents a deduction from their total
estate, which currently can be passed to you tax-free up to
$2 Million (I think), and the excluded limit is going up
each year until 2010, when it completely disappears -- but
only for 1 year.

Bill

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"Simba327" <googlegroups[at]smithfinancials.com> wrote

- quote -

They should, yes. Although there may not be any gift tax
due, as they would deplete a portion of their unified credit
agains any estate tax.

- quote -

Obviously that is an option to consider to reduce the amount
of the exclusion that gets reduced. Consider having them
"gift" that $48,000 in 2006 and another $48,000 in 2007.
That covers $96,000 of additions to your house.

--
Paul Thomas, CPA
paulthomascpapc[at]bellsouth.net

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Mom and dad sold their primary residence and excluded the
entire gain. Now they want to use about $100,000 to add on
to my home. Will they have to file a gift tax return? They
will have no interest in the property, but the addition is
for their use as long as they are living. If they do have to
file a gift tax, can they exclude $12K each to both my wife
and I, for a total of $48K?

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