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Elderlaw: 03/15/2014


Dear Len & Rosie,

My sister recently divorced. She was able to keep her home, but she had to pay her ex-husband $200,000 for his half. Our mother, who is 82 and is worth over $2,000,000, gave him the money to get him off the title to my sisterís home.

What are the tax implications of this? My mother says she can take the money from my sisterís inheritance. Everyone thinks this is a good idea. How do we do it? Should my mother be on title to the home with my sister? Should my sister give our mother a promissory note even though she wouldnít be able to make payments on it?


Dear Wilson,

When a parent gives money to a child, it is presumed to be a gift and not an advancement against the childís inheritance. The best way of dealing with this, assuming your mother doesnít want or need the money back during her lifetime, is for your mother to amend her estate plan to take this gift into account. She can leave each of her other children $200,000 off of the top to make up for this gift, and then leave everything else equally among the children, assuming that this is what your mother wants to do.

There are not going to be any adverse tax consequences to this gift. Your mother will have to file a gift tax return, IRS Form 709, with her income taxes next year, but she will not have to pay any gift tax, because it will be paid by her federal gift and estate tax unified credit, which in 2014 protects $5,340,000 from gift and estate tax. Your motherís $200,000 gift will reduce the amount of her assets that will pass free of estate tax by $186,000, which is $200,000 less the $14,000 annual gift tax exclusion. Unless your mother wins the lottery, this isnít going to create any actual gift or estate tax liability. And just to be clear about it, your sister does not have to pay income tax on this gift.

Doing it this way is easier than your mother being on title to property with your sister, and itís probably more fair. It is also better than having a promissory note your sister wonít be making payments on, because the tax authorities may assume the interest your sister doesnít pay as having been gifted back to her. Your mother could even be made to pay income tax on interest payments she never receives. Do not open this can of worms.

If your mother has a trust (which she ought to have, given that a $2,000,000 estate earns a lawyer $33,000 in probate fees), she can amend the trust to include a schedule of advancements to make things even when she dies. This way, your mother can record future gifts made to each of her children and avoid having to go back to her attorney every time a child needs money.

Len & Rosie

Dear Len & Rosie,

My mother is 78 and of meager means. She has no real property but does have several thousand dollars in a Vanguard rollover IRA. She does not have a will and I believe that there is really no need for one. Iím hoping that you can tell me that I am correct. If she chooses to name her five children the beneficiaries of the IRA, does this allow us, in the event of her death, to avoid probate?


Dear Mona,

Your motherís estate will avoid probate if the assets titled solely in her name upon her death total less than $150,000. From what you have told us, she has nothing to worry about. She can avoid probate with ďpoor manís estate planning.Ē

She should name her children as IRA beneficiaries, assuming she wants them to get the money. Anything passing upon her death by means of a pay-on-death beneficiary designation will avoid probate. And itís good for her children, too. If your motherís IRA pays into her estate, it will be subject to income tax upon her death. But if you and your siblings inherit the IRA as designated beneficiaries, you will have the opportunity to stretch out IRA distributions over your own life expectancies. This may not mean much if the IRA is worth only a few thousand dollars, but for readers of this column who have significant funds within IRAís or other retirement accounts, itís always important to verify that you have beneficiaries.

Your mother can also name the children as joint tenants or pay-on-death beneficiaries on her bank accounts so that they will also pass free of probate upon her death.

The only downside to avoiding probate this way is that if one of the children were to die before your mother, that childís living descendants, if any, wonít inherit anything. Only the surviving joint tenants or pay-on-death beneficiaries will get a share. But as your mother doesnít have that much anyway, itís probably OK to do this. She can update her beneficiary designations upon a childís death if she is able to.

She does not need a will if she wants everything divided equally among her children. If she dies without a will, her children and the living descendants of her deceased children will inherit her estate by intestate succession. But that doesnít mean your mother needs no estate plan. At the very least, she should have a durable general power of attorney and an advance health care directive. These documents are very important because they will give her children the means of making important legal and medical decisions on her behalf should she ever become incapacitated.

For those of you readers who own homes, poor manís estate planning is not for you. It is almost always a bad idea to put your children on the title to your home, because theyíll be part owners now, not just upon your death. If you want the property back in your name, they may not be willing to cooperate. If you own a home and you want to avoid probate, you need a trust.

Len & Rosie

Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at Len also answers legal questions each weekday, Noon-1 p.m. and Sundays, 4-7 p.m. on KGO Radio 810 AM.

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