Inheritance Tax question

[JCX5]

I know there are some accountants out there - and maybe a lawyer or two...

I'm in NJ - so is my mother. She is starting to think about transferring assets to her children to avoid us having to pay inheritance tax 'when that time comes'. So - couple of questions.

1) is every inheritance dollar taxed - or only over a certain limit? Is it based on the value of the estate - or amount given to each child?

2) what is that percentage?

3) is it generally a wise thing to tranfer ownership of her primary household - or keep it in her name?

TIA

[labatt]

Talk to a lawyer about a living trust... here's some info online... http://www.savewealth.com/planning/estate/livingtrusts/

[JCX5]

We'll look into it.

[Xcelllent_X5]

I'm not an attorney. I am going through the same thing with my parents. Your parents can give you whatever they would like from the estate. The tax free limit is $2M. After the 2m mark, you then get into capital gains, inheritance tax, etc. You must be aware that anything that is given to you prior to their death also comes with their basis for tax purposes. Example: They bought their homestead for $100K, the house will now appraise at $500K. If they give you the house, you assume their basis of $100K for tax purposes whereas if the house comes to you via the estate, your basis becomes the $500k number. Why do you care? If the property was given to you and you sell for $500k you will pay capital gains on $400K. However, if the property was willed to you via the estate, you sell the property for $500k, you have no capital gains. There are some other pitfalls to avoid as well.

Check with an attorney that you trust for each state has some funky rules concerning basis and capital gains, etc. Good Luck.

[motordavid]

JC: V.good advice from Labatt and Excellent...

Have been through the processes and the denouement w/both my M&D and theMissus's Mother. They were all smart people w/some decent planning, but the IRS/estate tax rules are very complex and also have considerable variances from state to state.

Not trying to spend your M's $, but get her to a smart, Experienced Estate Att. in your M's home state. Don't bat an eye at his charge for an interview or two; it will be worth it. He/she should have some good ideas and options the avg. layman never dreamed of. Get a trust, living will and esp. Pow of Att. nailed down,(he will generate these for you).

You & your siblings are not being "vulturish" about this; but, it will save her some grief and you some real headaches and heartaches down the road. And, when Mom finally bakes that last cake, be prepared for a couple yrs of tax filing on her last situ and a lil'arm wrestle w/both state and Fed taxman.

It's a topic most young adults try to put off; they should not avoid talking and detailing the potential resolution of that elephant in the room.
My 2Cts. GL,md

[twm67]

Originally Posted by JCX5

I know there are some accountants out there - and maybe a lawyer or two...

I'm in NJ - so is my mother. She is starting to think about transferring assets to her children to avoid us having to pay inheritance tax 'when that time comes'. So - couple of questions.

Hi, there - I'm a CFP(tm) by profession, so I'll type what I can here, but if you want to talk about this more, lemme know!

The essence of what your trying to accomplish is reducing your mom's estate through gifting so that upon her death the "shrinkage" of her assets will be minimal because of taxes, administrative expenses and other liabilities.

Originally Posted by JCX5

1) is every inheritance dollar taxed - or only over a certain limit? Is it based on the value of the estate - or amount given to each child?

Generally speaking, if your estate is over $1.5MM, there will probably be tax due upon your death (federal and state and income tax). The question you need to ask while adding everyting up is what does she owe, what does she own, and has she made gifts in the past.

Gifting rules aren't the easiest. Everyone has the ability to give up to $1MM during your lifetime (Lifetime Gift Exclusion). Everyone also has the ability to make annual gifts of $11,000 per year without paying gift taxes. If you give the $1MM during your lifetime, you lose most of the $1.5 MM exclusion at death. I know that doesn't make sense, but that's the deal.

Originally Posted by JCX5

2) what is that percentage?

The gift tax is about 50% of the value of the taxable gift. If she gives something worth $75,000 to you and 3 siblings, she will have made a taxable gift of $31,000. ($75,000 - (4 x 11,000)). She'd pay an additional $15,500 or so in taxes when she made the gift. She could allocate that $31,000 towards her lifetime exclusion, but that would reduce the credits at death.

This is fun isn't it??

Originally Posted by JCX5

3) is it generally a wise thing to tranfer ownership of her primary household - or keep it in her name?

TIA

Here's where you can get in trouble. Any gift has to be for the fair market price of the asset. If your parents transfer the deed to you and your siblings, and only value the gift for $300,000 and the house is really worth $500,000 - you've made a gift in violation of the tax code (gimme a few minutes and I'll quote the code citation :p ).

Also, if your mom gifts the house, but still lives in it, she is required to pay you rent for her right to live there. If she doesn't - it's not a complete gift and it won't count to reduce her estate.

I've opened a can of worms for you, so let me know how to clarify and expound!!

Also - get counsel immediately. You'll need someone to do all these things for you, and back you up with your decisions.

Disclaiimer - this is general advice, not specific recommendations!!!

[Xcelllent_X5]

MD is correct and it cannot be overstated how important it is to get to a good and trusted elder affairs and/or tax attorney and make sure that you get all of the paperwork (as MD recommended) squared away while your parents are in reasonably good health and more important, in a clear state of mind. If these issues are addressed and taken are of now, it will make for less frustration and less monies spent once your parents have passed on. Lots of work ahead for you, your siblings and your parents now, but trust me, it is better to do it now, rather than after their death. Good Luck. George

[rangerfan]

Like TWM67, I also do this stuff for a living. Great advice from all here, and pretty accurate too. TWM is in NJ so he can probably suggest some lawyers for you. I can as well if you need someone local.

I am happy to offer more info and advice if necessary. Depending on her health, and the size of her estate, Long Term Care Insurance should also be a consideration. I can help you out with that as well.

But a good rule of thumbs is, if she has the cash, and wants to get rid of it now, make $11,000 gifts to anyone and everyone in the family now, and again on January 2, 2006, and every year thereafter! The gifts should go into UGMA or UTMA accounts for the grandkids, and you can be the custodian. 529 accounts might be a consideration as well.

I could go on and on, but I won't, other than to say, this is nothing more that educational info and not a recommendation.

[JCX5]

Scheduled appt w/lawyer in 2 weeks to discuss.

Thanks for all the excellent advice - as usual.