Receiving
a gift, a bequest or other inheritance carries a unique set of federal income,
gift and estate tax rules that must be observed. Knowing what the rules are will
help you prepare for any tax consequences that may ensue upon the ultimate sale
or other disposition.
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 does not exceed $12,000 for 2007 and 2008 — $24,000 if the gift is given jointly
by a husband and wife.
The
Tax Relief Reconciliation Act of 2001 made some major changes in tax rules governing
estate and gift taxes, including the eventual repeal of estate taxes and modification
of the gift tax for year 2010. For the years 2006 through 2009, the estate tax dollar amount
threshold rises from $2 million in 2006, 2007 and 2008 to $3.5 million in 2009.
Also, as of 2002, federal gift tax begins only with gifts in excess of a $1 million
lifetime exclusion. The law now states that after December 31, 2010, federal estate
and gift tax rules revert back to what they were in 2001.
For
income tax purposes, for property that has been acquired by gift, the basis to
the donee (the recipient) 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 determined or the fair market value of the property
at the time of the gift, whichever is lower.
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.
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, qualifies 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 The Henssler Financial Group Tax &
Accounting Division at 770-428-4025
