Life Estate Deed with Powers

Forum|Forum|1 year ago
April 18, 2024
2 replies
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We added our three children to our deed via a Life Estate with Powers. The three remainderman are designated as Tenants in Common. Looking into the future, when my husband and I pass, will the property be taxed when it is sold, and if they are to divide the proceeds equally, will each one have the responsibility of 1/3 of any amount due? Also, we made this change three years ago. Is this considered a gift, and were we supposed to fill out any forms related to the IRS? Thank you.

Anonymous_

Employee

@Mimi1944 wrote:

......when my husband and I pass, will the property be taxed when it is sold......

When your husband and you pass, your children will take the property at a basis stepped up to fair market value on the date of the last of you two to die. Any sales proceeds will be divided three ways unless the three of them decide to make different arrangements.

In which state is the property located? Is the life estate deed a Lady Bird (Enhanced Life Estate) deed (if you know)? Otherwise, a life estate typically results in a future interest (a remainder) which would be a gift to the remaindermen and would most likely have to be reported to the IRS on Form 709.

See https://www.irs.gov/instructions/i709#en_US_2023_publink16784xd0e649

[note that the annual exclusion is not available for a gift of a future interest]

Mimi1944Author

We live in Maryland. I've heard of Lady Bird deed, but not sure if that is accepted in Maryland.

So, does that mean we should have filed Form 709 3 years ago or now or does the executor of our will file that with the last tax return when the last of us passes?

There are some terms that seem interchangeable so that is why I am confused.

Also, when my children take the property at a "basis stepped up to fair market value on the date of the last of you two to die," that's a good situation, right? I just wanted the children to be prepared if there would be a lot of taxes due. Thank you so much for any clarification.

Anonymous_

Employee

@Mimi1944 wrote:

We live in Maryland. I've heard of Lady Bird deed, but not sure if that is accepted in Maryland.

They are not valid in Maryland. Lady Bird (Enhanced Life Estate) deeds are valid in Florida, Texas, Vermont, West Virginia, and Michigan.

@Mimi1944 wrote:
So, does that mean we should have filed Form 709 3 years ago.......?

Yes, a Form 709 should have been filed when the remainder interest was granted.

@Mimi1944 wrote:
Also, when my children take the property at a "basis stepped up to fair market value on the date of the last of you two to die," that's a good situation, right?

Yes, that is generally be a "good situation" as opposed to taking the property with your cost basis (which would almost certainly be much lower, meaning they would be subject to more capital gains tax when they sell).

Mimi1944Author

Because we didn’t know to file the form 709 three years ago, can you tell us how we go about doing that? Do we fill one out retroactively, and continue to fill one out each year. Or, is it a one time deal?

I looked at the form and it’s too complicated for us because we don’t understand the concept. Are we in trouble with the IRS? Does Turbo Tax offer assistance? If not, can you point us in the right direction. I think we’re over our heads, and the lawyer who helped with the Life Estate Deed has since retired.

Thanks in advance for your much needed advice.