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Taxes, life estates and other estate planning considerations, P.1

A recent article in the Star Ledger described the situation of a disabled man who left his home and property to his cousin in his will, and later wanted to sell them to his cousin at the lowest price permitted by law, and live there until his death. The disabled cousin proposed to pay utilities, property taxes, and expenses for the interior of the house, and to have his cousin maintain the exterior of the home and property.

The article goes into several considerations that should be made before such an arrangement is set up. Among the considerations are inheritance tax, gift tax, capital gains tax, and whether a life estate would be a more proper setup than an outright gift or sale.

In terms of inheritance tax, if the house and property are left under the will, the cousin would have to pay New Jersey Inheritance Tax on the transfer since he is considered a class "D" beneficiary, since he is a cousin. The inheriting cousin will owe 15 percent of the fair market value on the assets unless there is a provision in the will indicating the disabled cousin's estate will pay the tax.

But if the property is sold at fair market value, there would of course be no state inheritance tax at the time of death.

As far as gift tax, in the event that the property is gifted or sold for less than fair market value within three years of the cousin's death, there would be a presumption that the gift was made in preparation for death. Taxes would therefore be due on the transfer, which would need to be reported on a New Jersey Inheritance Tax Return, Schedule C. The presumption that the property was transferred in preparation for death can be rebutted by providing evidence that the transfer was made for another reason.

Something to keep in mind about accepting a gift of the property is that any difference between the sales price and the fair market value of the property would be considered a gift for tax purposes. The lifetime federal gift tax exemption now sits at $5 million, so if the gift is less than that amount, no federal gift tax will be due.

In our next article, we'll continue exploring this article.

Source: Star Ledger, "'Know your goals,' estate planners say," Karin Price Mueller, 7 June 2011.

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