Handling of Disclaimer of inherited Real property

[fpc]

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!

[Anonymous_]

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@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,

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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

[Anonymous_]

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@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. 

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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.

[fpc]

Yes.  Thank you.

I doubt the estate has earned much interest since May of 2020 when the surviving parent passed.

[fpc]

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!

[Anonymous_]

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@fpc wrote:

Once the Qualified Disclaimer is submitted to the Executor, I would think the "gift" would be considered made.  

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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. 

[Anonymous_]

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@fpc wrote:

I didn't realize you could spread the Quit Claim process out over two years. 

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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.

[Anonymous_ · Accepted solution]

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@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.  

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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.).

[fpc]

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!

[Tbsfca]

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.

[fpc]

Learned nothing new.  

But there was no gift tax involved since the property was never actually owned by the heirs.  In other words, the heirs didn't give away anything -- each heir had nothing to give since they disclaimed the inheritance to begin with.   The process worked nicely.

[Tbsfca]

Ah, interesting. I'll keep researching. Even if a non-qualified disclaimer where the heir doesn't take possession of the property/assets, it seems the gift tax comes in. Again, not a need to pay a gift tax, but a need to file gift tax returns as part of the lifetime exemption. 

Even the article you'd quoted points in that direction.

In any case, I'm glad it seems to have gone smoothly for the people you were helping out!

[Anonymous_]

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@Tbsfca wrote:

....Even if a non-qualified disclaimer where the heir doesn't take possession of the property/assets, it seems the gift tax comes in. 

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That would be correct. The non-qualified disclaimer would be effective for inheritance purposes only; not for tax purposes.