Q:

Subject: Gift & Estate Tax

First, let me say thank you for posting your website.

It is very informative and I appreciate the time it took to provide this information on the web. 

If I may, I do have a couple of follow-up questions?

I and my father are residents of another state.  He is now 75 yrs. old and owns property in AR with a current estimated value of $600,000.  His total estate is less than $1M.  He is planning on gifting the property to me now.  I understand the value of the property would be subject to Gift Tax, but could be used against his lifetime exclusion (2006 at $2M).  Are there any AR State taxes that would come into play now or upon the sale of the property?  Thank you for your time.

A:

You and your father really should be working with a competent professional tax advisor to work out the best plan because there are some big issues to consider. 

Mainly is the issue of cost basis.  While gift and estate taxes are based on the property's fair market value, the basis of the property for you as recipient will be the same as it was for your father.  This means that you will be accepting responsibility for future capital gains taxes (Federal + Arkansas) if you sell it.  This is very different from the cost basis you would have if you were to inherit the property from your father's estate.  In that case, under current law, your cost basis would be the fair market value as of the date he passed away, essentially wiping out all of the accumulated gain.

There is a very simple and frequently used method to transfer property while your father is alive and avoid the basis problem.  He could sell it to you at the current market price and carry back the sales price as a note.  This would establish the higher cost basis for you.  You could then either pay off the note or your father could gift you forgiveness of all or parts of its balance.  Any competent tax advisor could help you structure this technique.  

If you all and your advisor do decide to do a straight gifting of the property, you will have to file a Federal Gift tax Return (Form 709).  Arkansas does not have a gift tax. 

You are mistaken on the lifetime exclusion amount for gifts.  It did used to be true that this amount was the same as the estate tax exclusion.  For some reason, our rulers in DC decided to uncouple the two figures  While the estate tax exclusion is $2,000,000 for people passing away in 2006, the lifetime gift exclusion is still only one million dollars and will not be increased in future years, even though the estate tax exclusion will be going up in the future, until it drops back down to one million dollars in 2011 if our incompetent lazy-ass rulers in DC don't take any action. 

I hope this gives you some ideas of what you and your father should be discussing with your personal tax advisor.  Good luck.

Kerry Kerstetter

Follow-Up:

From your message I take it that there is an AR tax on the gain from a sale of the property?  thanks

My Reply:

That's correct.  It normally works out to be 5.0% for long term capital gains.

KMK

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/14/2006 12:24:00 PM Send this post: