Under the current tax law, if a taxpayer retains a life interest in his property (e.g. retains the use or income derived from property for life and gives it away at death), the value of the property will be included in the calculation of the taxpayer's gross estate even though he/she will not own the property at his/her death. Selling your remainder interest (i.e. the interest to own the property after your death) in the property may be a way to avoid including value of the property in your gross estate. How Will Selling My Remainder Interest Help Reduce My Estate Taxes?Since estate tax is a tax that is imposed on a person's gross estate, a way to reduce this liability is to reduce your gross estate as much as possible. By selling your remainder interest for full and adequate consideration in money or money's worth, you will not need to include the value of the property in your gross estate at your death. Full and adequate consideration usually is the fair market value of the remainder interest; this number can be very big or very small, depending how many more years the seller is expected to live. Here is an example of why this is beneficial: P decides to sell his remainder interest in his house (worth $200,000) for $55,000, the fair market value of the remainder interest. P retains the right to possess the house until he dies. P dies 5 years later, when the house is worth $550,000. P's gross estate will not include the value of the house at the time of remainder interest sale or the subsequent appreciation. Are There Any Income Tax Consequences To The Sale? Yes. Like the sale of any property, you may have to pay income tax on the sale of the remainder interest. If you make a gain from the sale (i.e. the sales price exceeds your basis in the property), then you will probably have to pay taxes on the gain. If the property is a capital asset, then the resulting gain will be taxed at a preferential capital gains rate. Selling your remainder interest in an installment sale is a way to avoid having to pay taxes on the entire amount of gain all at once. However, installment sales often include interest payments, which might increase the total amount of income that the seller needs to pay tax on. Do I Need an Estate Planning Attorney?Consultation with an attorney experienced in estate planning is essential to crafting an estate plan that is sensitive to both your needs and those of your loved ones. A lawyer will know which type of will or trust is right for you and will do their best to limit your tax liability |
