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Good methods of making gifts to children and grandchildren in the absence of available cash remain a challenge to many families. The Tax Court has reaffirmed its approval of the fractional gift of real property. Specifically, the Tax Court rebuffed the Internal Revenue Service's attempt to include the entire value of a prior personal residence in the estate of an woman who had previously given away fractional interests in it and who no longer lived there at the time of her death. The woman, Marion Powell, decided to move out of her home and into a retirement community. After making this decision, but before obtaining occupancy in the retirement home, she decided to give her residence to her children. Rather than give it to them all at once and pay gift tax, she chose to make annual gifts of fractional interests, in order to take advantage of the annual exclusion.
Once she obtained occupancy at the retirement community, she remained there until her death, when she owned a 40-percent interest in her former residence as a tenant in common with the children, who owned the remaining 60-percent interest. Before she died, no child ever occupied the residence as his or her primary residence and it was never used as an income-producing property. Marion Powell listed the retirement community as her residence for some purposes and her former residence as her residence for other purposes.
The Internal Revenue Service sought to include the full value of Marion's former residence in her estate under the provision of the law that says that an estate includes the full value of property when the former owner still retains possession or enjoyment of the property at death.
The Internal Revenue Service argued that she had never abandoned her former residence, that she lived in the retirement community only on a trial basis, and that there was an understanding with her children that the residence would remain her home for as long as she wished. The Tax Court found that there was no such understanding, express or implied.
The Internal Revenue Service further argued that as a tenant in common, she had the right to use and enjoy the entire residence at all times and that she retained possession or enjoyment of the entire residence as though she were the sole owner. The Tax Court did not like this argument because it ignored the fact that the rights of co-tenants are limited by the rights of others, as acknowledged by prior Internal Revenue Service Revenue Rulings.
Although this case does not introduce a new tax-planning idea,
it is still good to see an old idea reaffirmed as still being
effective. This case is distinguished from the case where a woman
allegedly sold her home to her children but continued to live
there until she died. Any gift or sale, if it is to be effective
for estate tax purposes, needs to look like a gift or sale in
all substantial respects.
Copyright Eleanor S. Hansen 1995
Deductions/Education/Gift&EstatePlans/HomeownershipIncentives/