THE CASE OF “OCTOGENARIAN OLGA’S ASSETS”

Olga was in her 80’s and in a nursing home, suffering from Alzheimers. Her pension income was such that her care was provided for so the only tax question was how to distribute her assets to her three children during her lifetime and how to prepare for the day when she passed on. In addition to a sizeable savings she had 30 acres of undeveloped land adjacent to a golf course. She had inherited the land from her mother 30 years before and the land had appreciated in value dramatically during that time.

Our first recommendation was that, since her care was assured by her income, cash could be distributed to the three heirs. The tax rule is that she could distribute up to $1 million to each of her children during her lifetime without having to pay gift tax or have that income taxed to the recipient, if it was cash. Her assets were under $1 million in total so no problem there. The guardian could distribute any amount of cash he wished, consistent with her will, without tax consequence. However, if he distributed any of the land, which had been platted into lots, she would pay no gift tax but her heirs would have to pay tax on the gain on the sale of that land and almost the entire amount of the sale price would be taxable at long term capital gains rates. Merely because the heirs would inherit the mothers’ cost basis in the land which would be the market value at the date mother inherited the land 30 years ago.

So, the strategy became very simple: Give the heirs cash during her lifetime, which is not taxable; sell enough lots during her lifetime to maximize the tax benefits of her very sizeable health care costs, and pass on the remaining land after her demise. The cost basis to the heirs on the date of their mothers’ death is the market value on that date so if they sold all of the land the day after her death there would be no income tax to pay.

Uncle Sam says there is one sure way to avoid paying taxes. Death. But it is a heavy price to pay.