My mother created a Life Estate last year for her house as part of Medicaid planning. I'm doing her taxes for the first time this year, and I'm trying to get the gift tax return done. I understand that the remainder interest in the house is a gift that my mother made to me, so a gift tax return needs to be filed since the amount is above the annual exclusion.
Note: my mother's estate will be well below the estate/gift tax exclusion amount, even if it reverts to the lower amount in 2026.
I understand how to calculate the gift amount:
The attorney who did the Life Estate said that they take the assessed value from the property taxes and divide by the equalization factor for the county/town. (My mother lives in New Jersey, which publishes tables of these equalization factors every year.) This results in a value for the house that is about 75% of what it cost to purchase it.
Another option is to use what was paid for the house which should be reasonably close to its market value as of the Life Estate signing. Houses in that area probably went up in value a little bit since my mom bought the house.
I know we could get the house appraised for what it was worth at the time of the Life Estate. That's another option, though of course we'd rather not spend the money and take the trouble if we don't have to.
A few thoughts:
Note: my mother's estate will be well below the estate/gift tax exclusion amount, even if it reverts to the lower amount in 2026.
I understand how to calculate the gift amount:
- Take the value of the house
- Multiply by the fraction of the remainder interest from the Life Estate and Remainder Interest Tables (pdf) based on Mom's age when the Life Estate was signed.
The attorney who did the Life Estate said that they take the assessed value from the property taxes and divide by the equalization factor for the county/town. (My mother lives in New Jersey, which publishes tables of these equalization factors every year.) This results in a value for the house that is about 75% of what it cost to purchase it.
Another option is to use what was paid for the house which should be reasonably close to its market value as of the Life Estate signing. Houses in that area probably went up in value a little bit since my mom bought the house.
I know we could get the house appraised for what it was worth at the time of the Life Estate. That's another option, though of course we'd rather not spend the money and take the trouble if we don't have to.
A few thoughts:
- I'm pretty sure I understood the attorney correctly about using the NJ equalized value ratios, but she did say some things are calculated differently for purposes of Medicaid versus income/estate taxes, and I'm wondering if this is one of those things?
- Or maybe the attorney uses this approach because it produces a value lower than market value, so if Mom needs Medicaid and I need to cover the cost of her care during the exclusion period due to the gift, a lower gift amount results in a shorter exclusion period.
- Otherwise, I'm not sure how much this matters as long as we use a reasonable value -- estate/gift taxes will not be an issue, and my understanding is that after my mother passes, I should get the house with a step up in basis anyway. (I'm interested in a reference for this, something besides all the web pages for elder law attorneys which say this is "typically" the case.) So the gift amount doesn't seem to be relevant in this situation.
- Even if we need to sell the house during my mother's lifetime, my mother's cost basis in the portion gifted to me as a remainderman determines how much capital gain I would have from the sale of the house, so it doesn't seem like the gift amount is relevant in this case either.
Statistics: Posted by w5000 — Mon Feb 19, 2024 10:20 pm — Replies 1 — Views 173