Property Acquired by Gift
or Through an Estate
The recipient of a gift or a bequest pays no
gift or estate tax. Those taxes, if
they are due, are payable by the donor (the person making the gift) or the
estate in the case of a decedent.
Generally, no gift tax is due for gifts to any one person that do not
exceed $11,000 in any one year, $22,000 if the gift is given jointly by a
husband and wife.
The Tax Relief Reconciliation Act of 2001 has
made some major changes in tax rules governing estates and gift taxes,
including the eventual repeal of estate taxes and modification of the gift tax
for year 2010. For years between 2002
and 2009, the dollar amount threshold over which estate tax begins rises from
$l million in 2002 to $3.5 million in 2009.
Also, generally beginning in 2002, federal gift tax begins only with
gifts in excess of a $1 million lifetime exclusion. As the law stands right now, beginning in 2011, federal estate
and gift tax rules revert back to as they were in 2001.
Although the recipient isn’t liable for the gift
or estate tax due in connection with the property received, the IRS can in
certain circumstances levy on the gift or bequest to get paid for the taxes
that are owed if the donor, the estate or the executor does not have sufficient
assets to pay all the tax due.
Fortunately, those are rare and unusual cases.
In addition to the annual exclusion, an
unlimited gift tax exclusion is allowed for amounts paid on behalf of a donee
directly to an educational institution for tuition payments and amounts paid
directly to health care providers for medical services on behalf of a donee.
Gifts. If
property has been acquired by gift, the basis to the donee (the recipient) for
income tax purposes is the same as it would be in the hands of the donor or the
last preceding owner by whom it was not acquired by gift. However, the basis for loss is the basis so
determined or the fair market value of the property at the time of the gift,
whichever is lower. In some cases,
there is neither gain nor loss on the sale of property received by gift because
the selling price is less than the basis for gain and more than the basis for
loss.
In the case of a gift on which the gift tax is
paid, the basis of the property is increased by the amount of gift tax
attributable to the net appreciation in value of the gift. The net appreciation for this purpose is the
amount by which the fair market value of the gift exceeds the donor’s adjusted
basis immediately before the gift.
Inherited property. Generally, the basis of any property, real
or personal, acquired from a decedent is its fair market value on the date of
the decedent’s death or on the alternate valuation date selected by the estate
for estate tax purposes six months after death. Principally, this “stepped-up” basis rule applies to property
acquired by bequest, devise or inheritance.
Property acquired by the decedent’s estate, as well as property acquired
directly from the decedent without passing through the estate, qualified for a
“stepped-up” basis.
Since, in community property states, each spouse
has an undivided half interest in community property, an heir, devisee or
legatee acquires the decedent’s half interest from the deceased spouse and is
entitled to a stepped-up basis under the foregoing general rule. The surviving spouse is also entitled to a
stepped-up basis for his or her half interest if at least half of the community
property in question is includible in the decedent’s gross estate for estate
tax purposes.
It is important to note that, although the Tax
Relief Reconciliation Act of 2001 leaves this “stepped-up” basis rule intact
from now until 2009, in 2010 (the year the estate tax is repealed), the general
rule will be that inherited assets will have the same basis that gifts have – a
carryover basis, with a limited exception for certain assets based on total
value ($1.3 million) and transfers to a surviving spouse (up to $3
million). The implementation of this
new system, should estate tax repeal actually not be called back by Congress
before 2010, adds a new layer of complexity to overall plans for wealth
transfer.
If you have any further questions on this topic,
or how the rules apply to your specific situation, please do not hesitate to
call.
