The Tax Prophet's Quiz, Part Two

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, May 17, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.

The Tax Prophet's Quiz, Part Two

:Question: A mother, the sole owner of her residence, places her daughter's name on title as a joint tenant. Which is most correct? (a) Mother has made a gift to daughter of half the residence; (b) Mother's estate still includes the entire value of the residence; (c) Both a and b are correct; (d) Mother's estate will include only half the residence's value; (e) No gift has occurred.

Answer: (c). Both a and b are correct. Under California law, the daughter has the right to break the joint tenancy and take title to half the property as a tenant in common; therefore, a gift of half the property has occurred, so the gift tax rules apply to the mother (few taxpayers are aware of this rule). If the mother pays gift taxes now and the property remains in joint tenancy, then the entire property is part of her estate, because her daughter has not contributed payments. The mother's estate will receive a credit for any gift taxes paid.


Question: A mother has a bank account and adds her daughter's name as joint tenant. The daughter makes no deposits to the account. Which is correct? (a) Answer c to the above question, or (b) There is no gift tax until daughter withdraws funds.

Answer: (b). Unlike the real estate joint tenancy example, the creation of a joint bank account is not a gift until the donee actually receives funds. Upon the mother's death, the amount in the account will be part of the mother's estate.


Question: A husband and wife, both U.S. citizens, purchase investment real estate as joint tenants. At the death of the first spouse (assume husband), the adjusted basis is $100,000 (purchase price of $250,000, less depreciation of $150,000) and property is worth $1,000,000. Which is most correct? (a) Half the property is in the husband's estate, but no estate tax will be currently owed on the residence; (b) The wife receives a full stepped-up basis to $1,000,000 and a later sale at that amount produces no gain; (c) The wife's adjusted basis is $550,000 and a later sale at $1,000,000 will produce a gain of $450,000; (d) Answers a and c are correct; (e) Answers a and b are correct.

Answer: (d). The decedent's estate includes 50% of the property's value, but the marital deduction eliminates any estate tax on the automatic transfer to the wife. At the wife's death, the entire value of the property will be included in her estate.

The wife, unfortunately, receives only a stepped-up basis on her husband's half of the property. If the property was simply held as community property, the wife would receive a full basis step-up. The moral: Know the tax consequences of how you take title to real property.


Question: An American woman marries a non-resident alien. She then places her residence, worth $500,000, and owned free and clear, in joint tenancy with her husband. True or False: The wife has made a taxable gift.

Answer: True. Although the general rule states that a husband and wife may make unlimited gifts between themselves without imposition of gift taxes, this rule is capped at $100,000 annually for gifts to a non-resident alien spouse. Assume the gift is valued at $250,000, 50% of the property's $500,000 value. After applying the $100,000 exemption, the wife has made a taxable gift of $150,000. The entire asset will remain part of the wife's estate, but her estate will be entitled to a credit for gift taxes paid. Since the property passes to a non-U.S. citizen spouse, the wife's estate will not be entitled to a marital deduction, unless a special "qualified domestic trust" is used.


Question: A father, a non-resident alien (the donor), gifts to is U.S. resident daughter (the donee) land worth $1,000,000 (his only U.S. asset), and he fails to file a gift tax return or pay taxes. Two years later, the property's value drops to $250,000. The IRS discovers the gift and claims there is $500,000 now owing for taxes and interest. Which is correct? (a) The daughter personally owes the full amount of taxes and interest; (b) The IRS can collect only against the father as the donor of the property; (c) The IRS has a tax lien against the property and can only foreclose against its lien (the IRS is limited to selling the property).

Answer: (a). When a non-resident alien makes a gift of U.S. real property (or other tangible property located in the U.S.) the gift is subject to U.S. taxes. Although the father is primarily responsible for the gift taxes, if he does not pay, the daughter, as the new owner of the property, has "transferee liability" (secondary liability for all gift taxes, plus interest). Note: the donee has personal liability when the donor does not pay, whether or not the donor is a foreign person.

The obligation to pay gift taxes is not restricted to a lien on the property; the IRS can also collect from the daughter's assets.

Note: If the father transferred $1,000,000 in funds to his daughter from his foreign bank account, no gift taxes would be owing, although the daughter must report the gift. However, if the father made the gift on condition that she purchase real estate, then the money would be considered a taxable gift of U.S. real estate. The moral: Foreign donors should make unconditional gifts of cash.




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