Life Estate Deed with Powers

[Mimi1944]

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.

[tagteam]

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@Mimi1944 wrote:

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

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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]

[Mimi1944]

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.

[tagteam]

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@Mimi1944 wrote:

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

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

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@Mimi1944 wrote:

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

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

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@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?

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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).

[Mimi1944]

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. 

[tagteam]

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@Mimi1944 wrote:

Do we fill one out retroactively, and continue to fill one out each year. Or, is it a one time deal?

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You would file the form just once for this gift (for the year it was given) and you can file it now, although is technically late.

It would probably be best for you to consult with a tax professional in your area.

See https://taxexperts.naea.org/expertdirectory

[Mimi1944]

Looking back at the replies, does the note you added below apply to our situation? What exactly does that mean?  So far, I've gathered from your answers that we should have filed Form 709 3 years ago, that it is a one time thing to do for this gift, and that we would file now using the correct year's form that the LIfe Estate Deed. Is all of this accurate?

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

[tagteam]

You would use the form that applies to the tax year in which the gift was made.

See https://www.irs.gov/prior-year-forms-and-instructions?find=709&items_per_page=200

[tagteam]

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@Mimi1944 wrote:

Looking back at the replies, does the note you added below apply to our situation? What exactly does that mean?

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The note (I believe you're referring to the text in the brackets) simply means that you do not get the benefit of the annual exclusion for gifts, which is $18,000 per person per donee for 2024 ($17,000 for 2023, $16,000 for 2022, $15,000 for 2018-2022).

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