I submitted a Qualified Disclaimer to the Executor of a Will to relinquish my rights to the inheritance of real property (a house and the land on which it is on) in Mississippi. There was no Trust involved.
I submitted the Qualified Disclaimer form 14 months after the death of the testator. So I missed the 9-month deadline.
I know there is an IRS consequence, but I don't know what form(s) to complete. It seems IRS section 2518 is involved. But I did not find what appears to be an appropriate form in TurboTax Home and Business.
Help appreciated. Thank you
@fpc wrote:I'm thinking it would be easier and more straight forward to use the 709's. There are four siblings involved and we'll have to guide each one through this process. Having them each file Quit Claim Deeds would prove challenging and time consuming.
Yes, but if quitclaim deeds are not used, you will have to guide them through the process of filing their 709s (if that route is selected). The form may appear "easier" and "straightforward" compared to a quitclaim deed but appearances are deceiving.
There are still other options available.
One such option would be to simply allow the sibling to occupy the property as that sibling's main residence with the understanding that the sibling will be responsible for all of the expenses connected with the property (e.g., property taxes, utilities, insurance, etc.).
You should consult with a legal professional in the state in which the property is located (Mississippi) since there may be liability issues.
Otherwise, there are really no federal tax consequences (beyond any income generated by the property) beyond having the property included in your estate.
Through research, I've learned that disclaiming inheritance results in the effect of a gift given to the heir(s) that ends up receiving the share you would have received. So it seems a form 709 would be completed with the "gift" shown to being given to heir(s) who have not disclaimed their portion by the close of Probate or final closure of the property transfer. After probate, if an heir wants to give/sell their portion, a quit claim deed would be prepared. Then I don't know: either capital gains would be declared or handled as a gift ... (?)
I haven't looked at the form 709 to check whether or not an area is set aside for disclaimers. But I won't be surprised if such a field is not there.
Thank you!
A qualified disclaimer results in you being treated as if you had predeceased the testator.
As a result, no gift tax return would be required.
Well, I had understood that to be the case if the Disclaimer was filed within 9 months of the death of the testator. But now it has been a year. In Mississippi, there is no deadline due to a change in the state law July, 2020. But the nine month deadline still exists for the IRS.
So ... I had understood the price to be paid for waiting would be the requirement to include the 'gift' as a p/o your lifetime exclusion (less $15,000??) and be entered on the 709.
Do you think that to be incorrect?
Thank you for your expertise !
@fpc wrote:....I had understood the price to be paid for waiting would be the requirement to include the 'gift' as a p/o your lifetime exclusion (less $15,000??) and be entered on the 709.
That may very well be the case, but how did you come to understand that?
I simply cannot find any statutory authority for that proposition nor any guidance from a regulatory agency.
Well, I believe I read that in an IRS publication, but I can't find it now. After I posted that question here, I read two other posts in another forum as follows (Note for both posts: There are 5 siblings. Four of the five are filing disclaimers which will leave the entire estate to the fifth):
"Congress wrote in the 9 month limit for disclaimers because it wanted a national standard for what would count as a disclaimer for federal gift tax purposes rather than relying on state law, which would create 50 different rules for what is effective for a disclaimer. So the federal rule is that the disclaimer must work under state law but also imposes some additional requirements, in particular the nine month requirement. By the way, that nine month period was not chosen arbitrarily. It was chosen because nine months after death is also the deadline for the estate to file its estate tax return, and the estate would need to know what disclaimers are being made to prepare that return.
The effect of missing the nine month deadline here is that each beneficiary making the disclaimer is treated as making a gift to the fifth sibling in the amount of the value of the share of the property that is being transferred. It is exactly the same tax result that would occur if the four siblings did quit claim deeds rather than disclaimers."
Here is 2nd post:
"A, B, C, D, and E each have a 1/5 interest in the value of the property. When A, B, C, and D disclaim their inheritance, each 1/5 is a gift to E for IRS purposes. A, B, C, and D would each have to file a gift tax return showing the amount that each has gifted to E. "
Thank you for your help!
@fpc wrote:The effect of missing the nine month deadline here is that each beneficiary making the disclaimer is treated as making a gift to the fifth sibling in the amount of the value of the share of the property that is being transferred. It is exactly the same tax result that would occur if the four siblings did quit claim deeds rather than disclaimers."
I would interpret current federal law as stating that a missed deadline is tantamount to not having filed a valid disclaimer (note the term "qualified disclaimer" is used in the statute).
As a result, the interest would vest in the beneficiary(ies) without a qualified disclaimer. Obviously, each beneficiary would then be free to gift the interest the beneficiary acquired to any third party and, if over the annual exclusion, would be required to file a gift tax return.
I looked in the instructions for the 709. Qualified Disclaimers are covered there. The 9-month deadline is mentioned. But no remedy is covered if the deadline was missed. One paragraph states:
"The 9-month period for making the disclaimer is generally determined separately for each taxable transfer. For gifts, the period begins on the date the transfer is a completed transfer for gift tax purposes."
Seems that the instructions would have been an appropriate place to state what happens when the 9 month period is missed. I suppose, in absence of a remedy, it is inferred that the Qualified Disclaimer rule does not apply and therefore the the surrender of the inherited property is considered to be a gift.
??
@fpc wrote:Seems that the instructions would have been an appropriate place to state what happens when the 9 month period is missed.
Exactly and, without more, the interest would simply vest as per the testamentary document.
You and I submitted posts at the same time.
Your interpretation makes sense to me. In my layman terms -- If you fail to take advantage of the Qualified Disclaimer, the property becomes yours and if you elect to surrender it, you do so as a gift. Fortunately, the state allows you to surrender the property by leaving it in the Will so that you do not have to file a Quit Claim Deed.
One additional question I have is whether a married couple could take advantage of a $30k exclusion for the inherited property. I would guess only a $15k exclusion would be available since only one person of the two actually inherited the property.
Thank you for helping with my understanding of this.
Yeah!
So again, luckily, Mississippi eliminated the deadline and therefore eliminated the need for Quit Claim Deeds in a case like this.
Thanks!
@fpc wrote:One additional question I have is whether a married couple could take advantage of a $30k exclusion for the inherited property. I would guess only a $15k exclusion would be available since only one person of the two actually inherited the property.
Inherited property is typically separate property in the context of a marriage, but the Code does allow for unlimited gifts to a spouse (so you could make a gift of half of the property to your spouse prior to gifting it to a third party).
Note that you might have to wait a certain amount of time to avoid the step transaction doctrine.
Interesting.
But in order to do that, I would have to take "possession" (no qualified disclaimer) of the inheritance then quit claim deed half of my interest to my wife. Then each of us would quit claim deed our halves to the 3rd party. I would miss out on the state qualified disclaimer.... So I'd have to pay for the filing of three quit claim deeds.
🙂
I'll have to look up Step transaction doctrine. I assume that indicates that you don't do all three QCD at one time. 🙂 Edit: I just read about it. The doctrine makes sense!
Or are you thinking of a much simpler approach?
What, exactly, is the goal here? Do you want the property to go to a relative for that relative's own personal use (or some other use but still owned by the relative/donee)?
Otherwise, you could sell the property (reduce it to cash) and simply make a deposit in a joint bank account with your wife. Thereafter, you could gift cash to the donee, either in full or within the annual exclusion.
There are most likely other strategies available but the objective is unclear.
Thank you for your concern...
Situation is, the surviving parent of 5 siblings passed in May of 2020. The parent left a Will naming 5 siblings as heirs. One of the siblings still lives in the house and plans to continue living there. The other 4 siblings have agreed to relinquish their interest in the house. So I am helping to figure out how to make that happen. Thus the use of Qualified Disclaimers. But since the 9 month period has expired, they'll have to declare that gifts were given to the sibling. And of course, they each have the $15k exclusion. And actually, I don't yet know how much equity is in the house. I know there is a mortgage and perhaps the house is worth around $130k. So there won't be any tax actually paid by the heirs and not a lot to report on the 709.
I've learned a lot through this process. Problem is I don't know what I don't know. But I think I know enough now to proceed with the process. There was no Trust, so the estate will have to be probated since it appears to be worth more than $75k. I've been looking at a 1040 for the surviving parent for 2020, a 706, which I don't think needs to be filed due to the size of the estate, and then a 1041 that should have already been filed, but hasn't been. I figure I'll just wait and file the first and final 1041 when probate is complete.
Thank again!
@fpc wrote:...I've been looking at a 1040 for the surviving parent for 2020, a 706, which I don't think needs to be filed due to the size of the estate, and then a 1041 that should have already been filed,
You should not have to file a 706 if the only asset is a house worth around $130,000; clearly that is not even a close call.
Further, you should not have to file a 1041 unless there are other assets since, presumably, no income would be generated by a house held for personal use; an estate is required to file a 1041 if the gross income for the tax year is $600 or more.
See https://www.irs.gov/instructions/i1041#idm140229151947712
@fpc wrote:
...I don't yet know how much equity is in the house. I know there is a mortgage and perhaps the house is worth around $130k.
If there are five beneficiaries, with equal shares, and the house has a fair market value of $130,000, then each beneficiary's share is worth $26,000. That interest could easily be divided and quitclaimed over a two-year span without even having to file 709s.
If there is a mortgage and the balance is $55,000 or more, then each of the four beneficiaries would be gifting $15,000 or less which, again, would eliminate the need to file a 709.
Yes. Thank you.
I doubt the estate has earned much interest since May of 2020 when the surviving parent passed.
I didn't realize you could spread the Quit Claim process out over two years. If you had time, perhaps you could explain that idea. Once the Qualified Disclaimer is submitted to the Executor, I would think the "gift" would be considered made.
I'm thinking it would be easier and more straight forward to use the 709's. There are four siblings involved and we'll have to guide each one through this process. Having them each file Quit Claim Deeds would prove challenging and time consuming. They live in three different states other than Mississippi where the house is.
Thanks for your continued support!
@fpc wrote:
Once the Qualified Disclaimer is submitted to the Executor, I would think the "gift" would be considered made.
If the disclaimer is not effective (for whatever reason), then the interest would vest in the beneficiary who made the (failed) attempt to disclaim. The gift to a third party is not automatically considered to be made in that instance.
@fpc wrote:
I didn't realize you could spread the Quit Claim process out over two years.
The quitclaim does not necessarily have to be 100% of the interest held. For example, in this instance, each beneficiary could quitclaim 50% of the interest in the first year and the remaining 50% of the interest in the second year.
Quitclaim deeds are not complicated. They typically involve the name and address of the grantor and grantee (in some states), a legal description of the property, and the exact interest conveyed (if less than the whole interest). The deed typically must be notarized and recorded. Again, the process is not overly complex.
@fpc wrote:I'm thinking it would be easier and more straight forward to use the 709's. There are four siblings involved and we'll have to guide each one through this process. Having them each file Quit Claim Deeds would prove challenging and time consuming.
Yes, but if quitclaim deeds are not used, you will have to guide them through the process of filing their 709s (if that route is selected). The form may appear "easier" and "straightforward" compared to a quitclaim deed but appearances are deceiving.
There are still other options available.
One such option would be to simply allow the sibling to occupy the property as that sibling's main residence with the understanding that the sibling will be responsible for all of the expenses connected with the property (e.g., property taxes, utilities, insurance, etc.).
Perhaps the decision should be left to each heir. Whether they would want to dump the entire package at one time or extend the process out over two years. As a result of this issue, I've asked the Executor for an estimate of the equity in the estate.
I'll update this thread at such time as some progress is made. I'll let you know what the heirs are doing.
Of course, very likely, as the process finally gets off the ground, more questions will arise.
thank you for your expertise and ongoing support!
You may want to research "non-qualified disclaimer" since as you mentioned, this would not be considered a "qualified disclaimer" since it falls outside the 9-month window. As I understanding it, the heirs disclaiming wouldn't be taxed because they are disclaiming it, but now the gift tax comes into play. I'm not a tax professional, but I think it does come down to being considered a gift and needing to file gift tax returns b/c the value goes beyond the annual $15k exclusion. But that doesn't mean they need to pay taxes on it - but they do need to file gift tax returns. Again, I'm still researching a similar situation myself but related to retirement accounts, not real estate.
If you've learned more in the meantime, please post.