Q: My mother has life rights to the home she is living in, which will pass to her husband’s (second marriage) children upon her death.
She owns a home that she lived in from 1971 through 1974.
From 1974 until the present, she has rented this home to others, collected rent, paid taxes and insurance and depreciated the property. The property has probably been depreciated all the way down to a zero basis.
She is thinking of deeding her rental home to me and my sister but retaining life rights for herself. She figures she could then continue to collect the rent and pay the taxes and insurance on the property.
What are the capital gains tax and gift tax ramifications of deeding the property to the two of us while retaining life rights? Will she owe a gift tax at the time of the deeding? Do we have to report the deeding as a gift to them? When our mother dies, does the property automatically become ours and would there any capital gains tax that we or her estate would owe?
If she kept the property in her name until she died, I believe it would pass to us in her will and no capital gains tax would be owed, because the value of the property would be stepped up to current market value. What should she do?
A: What I’m wondering if why your mother wants to change something that’s working for her. Is she trying to spare you a lot of estate hassles? Is her estate worth millions and she is worried about not being able to pass everything down tax free?
If your mother is trying to spare you from a lot of estate hassles after she is gone, she may want to consider establishing an irrevocable trust and name you and your sisters as the beneficiaries of the trust. If she wants to continue to receive income from the trust, it can be established in this way as well, but the ownership of the property will be held by the trust and not her personally.
Transferring the property to you and your sibling now could generate a tax bill unnecessarily. Please make an appointment for you, your mother and your sibling with her tax advisor and, perhaps, an estate attorney to discuss which type of trust will allow her to have the control she wants without paying taxes needlessly.
Feb. 11, 2005.
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