Gifts For Your Children: Selling or Transferring Property To Your Kids (Plus a Few Tax-Time Tips)

At this time of the year, we feel compelled to remind our followers of a couple of tax-time tips, all of which we have discussed several times in recent months:

  1. Recent changes to the law have forced financial institutions that manage brokerage accounts to distribute many more 1099 forms to clients than in previous years, which has caused a very late delivery of many of these forms. Some corrected 1099 forms may still on the way.
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    If you submit a corrected 1099 to the IRS after you have already file your taxes, you will most likely be subjected to a manual review, which is first step to being audited, so you want to avoid that, if at all possible. If you have just received your 1099, we recommend you apply for an extension to file your tax return.

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  2. If you are not in compliance with the laws regarding offshore assets, we strongly urge you to take advantage of the current IRS initiatives in place to make being compliant as painless as possible. The possible criminal penalties for non-compliance can be severe, so the sooner you make amends with your Uncle Sam, the better.
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    The FBAR form for reporting foreign assets needs to be mailed to a separate IRS office in Michigan and it needs to be filed by June 30, regardless of whether or not you have received an extension beyond that date to file your standard 1040 tax reporting form.

We discussed these tax-time tips on a recent edition of our weekly radio and web broadcast on KDOW 1220 AMWealth Management and You with Connie Yi.

Our primary topic of this show concerned the best ways to transfer your property to the next generation, with the main considerations being whether it is better to give real estate to your children as a gift or to sell it to them.

Some of the points we mentioned about this topic include:

  • If you are transferring a house and/or land, you must have an appraisal from a licensed real estate appraiser, not your Realtor’s or real estate broker’s professional opinion, despite how accurate it might be.
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  • If you gifted more than $13,000 to an individual in 2011, you must file Form 709 with your tax return.
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  • You must inform the IRS if you gift more than $5 million in your lifetime.
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  • For an inter vivos gift (aka “love & affection gift”), no transfer tax is due at the time you record the deed.
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  • A parent to child real estate transfer is exempt from reassessment, but you must file an exclusion report for reassessment with the county recorder’s office within three years or you lose that exemption.
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  • If you gift real estate, after you file a gift tax return and you file the deed, determine the gift income tax basis, so if your children sell the property they will only pay the transfer tax on the difference in the amount you paid and the amount for which they sell the house.
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  • If your heirs immediately sell property they’ve inherited, no gift tax is due.
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  • An existing mortgage on a property that is inherited as a gift can complicate matters, because a “due on sale” clause in the mortgage may apply, so consider that aspect of the transaction when creating your estate plan.
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  • If you “sell” real estate to your children, they should sign a promissory note to pay for the property over time, plus interest, at fair market value. Your children can then make interest-only loan payments back to you and receive a tax write-off for those payments. This can be advantageous, because in many cases the middle-aged children will be in a higher tax bracket than their retired parents.

Go to Radio Show Podcast ArchiveIn our final segment of this show, we briefly discussed the issue of being designated as a trustee of an estate, which we have also mentioned before.

The points we mentioned about voluntarily assuming this fiduciary responsibility include:

  • You do not have to accept the role of a trustee, if you feel you are not up to the task. It is an important job, especially to the beneficiaries of the estate.
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  • A trustee does not need special skills, but should be familiar with the family. A trustee can hire legal and financial assistance to manage an estate, at the expense of the estate.
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  • It may be a good idea to appoint co-trustees, to help family communications and avoid conflict.
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  • A trustee, upon the death of the testator, must (1) send a copy of the trust to all of the beneficiaries, who then have 120 days to content the will, and (2) send a copy and updates of the trust’s asset inventory to the beneficiaries.

If you missed the original broadcast of this show, you can listen to a podcast by directly streaming or downloading the MP3 file in our Radio Show Archive.

If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

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This entry was posted in Estate Planning, Estate Tax, Gift Tax, Radio Show: Wealth Preservation and You, Residential Real Estate, Tax Law, Trusts & Estates and tagged , , , , , , , , , , . Bookmark the permalink.

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