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thompsnlaw wrote:

My grandfather is 75 and in poor health. He just received an offer of $850,000 on his residence and is considering selling it and moving in with our family. He wants to distribute the funds among his children and grandchildren. However, none of us are sure how to handle this. I realize we will soon need to hire an
estate attorney, but I would really appreciate some constructive advice from others on this board so we will have some idea how this should work.


Your grandfather should definitely seek an estate planning attorney.

The major issue here is gifting vs. inheritance. Your grandfather may gift $10K/year/person without paying gift tax. Anything over that, and he will have to pay gift tax. This is not, however, the most serious issue. What your grandfather gifts to you during his lifetime will be gifted along with his cost basis in the property. In other words, there will be no step up in basis at his death.

Assets that are passed via an estate plan generally get a step up in basis so that the heirs do not have to pay much in capital gains if they sell the property soon after inheriting it. Obviously, if he gives you cash, there is no cost basis issue, but I suspect that there will be less cash from a sale during his lifetime than afterwards.

I understand the first $650,000 of the proceeds will not be taxed. Does anyone know approx what the tax rate will be on the remaining amount? My grandfather has virtually no other income.

I think you have a basic misunderstanding of the estate tax. It is not an income tax. It is a tax on the gross worth of the deceased's estate. The tax rate starts around 37% and goes all the way up to 55%. There is a $650K unified estate/gift tax credit. This would be on top of any income tax due at your grandfather's death. So, if your grandfather sells his home in the last year of his life, there will be income tax due on the sale (unless he's used his $250K capital gains exclusion recently) and estate tax due on the total gross worth of his estate. Note that the IRS does not allow you to substract any debts from the estate and that the tax is calculated on gross value.

Most important - My grandfather wants to go ahead and distribute these funds to his family while he is living. What is the best method for this to be done in order to avoid taxes? I understand he can distribute $10,000 to an individual without incurring taxes.

This much is true. However, it would be better if this were done through an estate plan that will maximize your grandfather's wishes, reduce costs and taxes, and maximize the assets he wishes to leave to his loved ones.

However, I have also heard that he can use the unified credit to distribute up to $650,000 without being taxed. How does this work? He has never given (or gifted) any significant amount of money to us during his lifetime.

Or anyone else? Note that it is a unified credit - all gifts made to all persons by your grandfather during his lifetime count.

Will we incur taxes if he distributes a large portion of his estate while living.

Your grandfather may incur taxes. More significantly, however, the assets will not get the step up in basis to the fair market value at the date of your grandfather's death. Thus, if he sells the house now, and gives you a sum of money, assuming the house is his only asset (bad assumption) there are potential gift and estate tax issues for the amount over the $650K unified credit. There will also be income tax issues, unless he can use his $250K capital gains exclusion.

On the other hand, if he keeps his house until his death and it is passed to his heirs, there are no gift tax issues, no extraordinary income tax issues other than a final income tax return, and estate tax on the value of his estate exceeding $650K. Furthermore, the heirs get the house stepped up to its fair market value as of the date of death, which means that if it is sold shortly after your grandfather's death, there are very few capital gains (income tax) due on the house from the heirs.

What also needs to be considered is whether your grandfather needs the money from the sale of the house to live on.

Something else to consider is the cost of probate. In California, it not only costs a lot, but it can take over a year to pass assets in this manner. In most states, when you have real property worth over a trivial amount of money, you usually cannot take advantage of the quicker procedures, such as probating an estate by affidavit. In CA, this procedure is not available for estates over $100K, so you would have to go through the full probate process.

An alternative to probate would be for your grandfather to have a revocable living trust. This keeps information about your grandfather's estate private, whereas the probate process become public record. Trusts are generally harder to break than wills. In addition, it is generally much cheaper to administer a trust than to pay the statutory attorneys'/trustee fees mandated by the Probate Code.

Hope this helps! Please help your grandfather get appropriate legal advice!
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