Don’t Gift it too Late

Although it is an unpleasant thought, suppose your family member has just been diagnosed with a terminal illness and will not live another year. As they prepare for their soon passing, they will make efforts to get their estate in order, which may include seeking opportunities to reduce the tax impacts of their death. In an effort to reduce the amount of estate taxes that will have to be paid, suppose they gift you their vacation home a few months before they pass away, removing the asset from their gross estate.

Generally, property that has been gifted away will not be included as an estate asset, for tax and other estate purposes. However, under 26 U.S. Code Section 2035, the fair market value of gifts and certain other property transfers are included in the amount of the gross estate for the purpose of calculating the estate taxes owed if the property was transferred within three years before the decedent’s passing. This rule prevents individuals, such as the terminally ill, from removing assets from their estate for the sole purpose of reducing estate taxes.

In our scenario, the fair market value of your family member’s vacation home will be added back into the total amount of the gross estate, increasing the amount of estate taxes owed. This statutory provision functions to nullify the estate tax benefits of certain transfers made within three years prior to death. The professionals at The Center for Financial, Legal, and Tax Planning, Inc. are more than knowledgeable with regards to creating effective estate plans to reduce estate tax burdens. Please contact us at (618) 997-3436 for more information.