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2) So my wife and SIL hopefully won't have to pay inheritence taxes at the time of her death.

Exemption amount for 2013 is $5.25 million. If she is worried about item 1, then item 2 shouldn't be a problem.

And, of course, Item 2 ignores the fact that by gifting the house to them, they inherit her basis, and so will owe capital gains taxes when they sell vs. inheriting the house at the stepped-up basis, and if the entire estate is below that threshold, no taxes would be owed.

So it's possible that she is actually creating a tax liability where there was none before by doing this.

Glad she is going to see an attorney to help her make appropriate plans.
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