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Author: susan400 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: estate and cap gaibns avoidence ?? Date: 11/17/2009 9:01 PM
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Estate strategy

A is 80 an owns 33 acres of land in a development area. A has the deed
Transferred to a grandkid for 1$. It is out of his estate. Then A and the grandkid make a side agreement where the grandkid agrees to pay, in cash X$/month for 15 yrs.

A pays no income tax , it I out of his estate, no inheritance tax. .

What are the risks and negatives cons of this?

TIA
Susan400
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Author: YewGuise Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107704 of 121219
Subject: Re: estate and cap gaibns avoidence ?? Date: 11/17/2009 9:05 PM
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Well, one "pro" is you've asked about it here, so we get the pleasure of watching how Phil responds. Wonder where he'll start...

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107705 of 121219
Subject: Re: estate and cap gaibns avoidence ?? Date: 11/17/2009 9:59 PM
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I second that Phil is going to have a significant number of comments. Do-it-yourself estate planning is really expensive. I predict this will be one of Phil's first comments. You need local professional advice. Do not do what you are proposing. Also, it will be difficult if not impossible to undo when the inevitable problems occur.

What you are proposing will create tax liability for the grandparent and the other "minor issue" for all concerned of tax fraud. Selling property to a relative at below that market value generates income tax liability.

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107706 of 121219
Subject: Re: estate and cap gaibns avoidence ?? Date: 11/17/2009 11:09 PM
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Estate strategy

A is 80 an owns 33 acres of land in a development area. A has the deed

Transferred to a grandkid for 1$. It is out of his estate. Then A and the grandkid make a side agreement where the grandkid agrees to pay, in cash X$/month for 15 yrs.

A pays no income tax, it I out of his estate, no inheritance tax. .

What are the risks and negatives cons of this?
TIA
Susan400

==========================================
Risks:
1. IRS may apply what they call the "step transaction doctrine", and put the transaction pieces together, and decide that the essence of the transaction is that A sold the land to the grandkid for either:
a. an installment sale
b. a private annuity

A "side agreement" like that would likely be treated more like a "front and center" part of the whole deal.

2. Depending on the actual numbers, for the value of the land vs. the value of the payments, there might also be a gift tax assessment.

Definitely an issue requiring professional help.

Bill

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107708 of 121219
Subject: Re: estate and cap gaibns avoidence ?? Date: 11/18/2009 1:31 AM
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Estate strategy

Uh, yeah, I guess we could call it that. It may just be a really awful DIY estate plan. Or it could be fraud. It's hard to tell with so little information.

A is 80 an owns 33 acres of land in a development area.

See, what I can't tell is whether A is fixin' to die or A is fixin' to sell the property to developers now that things are starting to come 'round a little and the developers are starting to dream their dreams again. If it's the former he needs an estate planner. If it's the latter he needs a good income tax planner. I suspect we're talking about a sizeable chunk of change, so A could probably find both at one really good law firm.

Phil
Rule Your Retirement Home Fool

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107709 of 121219
Subject: Re: estate and cap gaibns avoidence ?? Date: 11/18/2009 11:37 AM
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I'm probably late to the party, but here's my take.

A is 80 an owns 33 acres of land in a development area. A has the deed
Transferred to a grandkid for 1$.


A has made a gift of the FMV of the property (less $1) to his grandkid. He'll need to file a gift tax return and pay the appropriate gift taxes. In case you don't know, gift taxes are roughly the same as the estate tax.

The grandkid would take over A's basis in the land. When he sells it, he would have to pay all of the income taxes on the gain while A held the land. Grandkid may not be happy about that.

It is out of his estate.

Yes and no. Your lifetime taxable gifts are added back into your remaining estate for purposes of calculating the estate tax. Then you subtract off the gift taxes paid to get to the amount of the estate taxes. So any appreciation would be removed from the estate, but the FMV on the date of the gift is accounted for in the estate tax calculation.

Then A and the grandkid make a side agreement where the grandkid agrees to pay, in cash X$/month for 15 yrs.

OK. Toss out everything I said above.

Phooey on the side agreement. The IRS will see right through this sham. The grandkid is purchasing the land from A. The purchase price would be the present value of those monthly payments. If that value is less than the FMV of the property on the date of sale, the difference would be a gift, and handled as explained above.

A would have to recognize a capital gain plus the interest in the monthly payments. He could take advantage of installment method of reporting his gain on the sale, spreading the taxes out over the 15 years of payments.

Should A die before all of the payments are collected, his heirs would have to continue reporting the installment sale income.

A pays no income tax , it I out of his estate, no inheritance tax. .

A pays no taxes because he lied on his return, not because he followed the tax laws.

What are the risks and negatives cons of this?

Depending on the mood of the IRS examiner, there is potential for criminal tax evasion. That could mean jail time for A or grandkid or both. At the very least, A would be looking at tax fraud and a boatload of back taxes, interest and penalties. I'm not sure if the IRS could put a lien on the property to get those taxes paid - I'll leave that one to Phil. If so, that might cause grandkid to lose the land when the IRS seizes it to pay the taxes evaded in the fraudulent transfer.

Do you get the impression that I think this is an exceptionally bad idea? You should.

--Peter

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107710 of 121219
Subject: Re: estate and cap gaibns avoidence ?? Date: 11/18/2009 12:48 PM
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There are other complications as well.

For example if the grandkid gets divorced, then the ex-spouse could get half the property, and if the stars light up right the ex might not even be not responsible for any of the "side agreement".


The bad possibilities are endless.

Greg

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107711 of 121219
Subject: Re: estate and cap gaibns avoidence ?? Date: 11/18/2009 12:55 PM
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A is 80 an owns 33 acres of land in a development area. A has the deed
Transferred to a grandkid for 1$.


A has made a gift of the FMV of the property (less $1) to his grandkid. He'll need to file a gift tax return and pay the appropriate gift taxes. In case you don't know, gift taxes are roughly the same as the estate tax.


With one MAJOR difference. The maximum lifetime gift tax exclusion is only $1million of gifts. The Estate Tax exclusion is $3.5million of taxable estate. Where I live 33 acres would be worth far more than $1million.

Ira

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107712 of 121219
Subject: Re: estate and cap gaibns avoidence ?? Date: 11/18/2009 1:04 PM
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I'm not sure if the IRS could put a lien on the property to get those taxes paid

Oh yeah, unless there had finally been a straightforward business transaction in which the property was sold to a real live purchaser for fair value. In such an event the real estate would be beyond a lien, but the players are still fair game for transferee liability.

Phil

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107713 of 121219
Subject: Re: estate and cap gaibns avoidence ?? Date: 11/18/2009 3:28 PM
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Phooey on the side agreement. The IRS will see right through this sham. The grandkid is purchasing the land from A. The purchase price would be the present value of those monthly payments. If that value is less than the FMV of the property on the date of sale, the difference would be a gift, and handled as explained above.

A would have to recognize a capital gain plus the interest in the monthly payments. He could take advantage of installment method of reporting his gain on the sale, spreading the taxes out over the 15 years of payments.

Should A die before all of the payments are collected, his heirs would have to continue reporting the installment sale income.


What Peter said. The above part is the only area where there would be quibbles, and that is in the technical details of handling the installment sale (off the top of my head, I'm thinking the effective rate on the sale could be below the AFR and that could trigger all sorts of other issues), but he's at least 98% right. Bottom line is it's a REALLY bad idea.

OTOH, they could do something like create a FLP, transfer the property into that, sell the non-voting FLP interests to an intentionally defective grantor trust (down payment plus installment note) OR transfer those interests to a GRAT, then the trust would sell the property to a developer and use the cash from the sale to make the GRAT payments or installment note payments. There would be cap gains issues on the sale of the property to a developer, but it could accomplish a lot of estate planning goals.

Of course, that's the sort of thing that should be discussed with a competent, knowledgeable estate tax attorney, not as a DIY project based on something you read on an internet message board.

-synchronicity

Circular 230 disclaimer: nothing in the above should be taken as tax advice or can be used to avoid any penalties the IRS may impose. I may be a doofus who doesn't know anything

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