do i need to be listed as a co-owner on a building with a parent to avoid inheritance tax?

Answer 1

Being a co-owner will not avoid estate tax and you probably do not wish to operate in this way. You have several issue, liability, gift tax, and estate tax. You asked about estate tax so I will address that one first.

Estate tax is imposed on the value of all property owned at your death. There is a credit available which covers the tax on a portion of the estate. Currently the credit shelters $2Million from tax. It is currently scheduled to cover $3.5Million in 2009. Under the current rules the estate tax will abate in 2010 and there will be no estate tax owed. In 2011 the estate tax returns with a sheltered amount of $1Million. The current estate tax rate is 45% but it will be back to 55% in 2011. This percentage applies to any amount over the sheltered amount.

If the total estate is below the shelter amount then no estate tax will be due. Please note that this answer discusses only Federal Estate tax. Many state are 'coupled' to the Federal Estate tax and only take the available credit. If your state has de-coupled then you could still have potential for state estate tax.

If you inherit the property in any year other than 2010 then you receive a step-up in basis and will not incur tax on capital gain if you should sell the property at that value. In other words, if your parents bought the property for 100K and at death it is worth 500K then your new basis is the 500K and a sale at that price would not impose tax. If you keep the property for some time and it appreciates to 750K then you only recognize $250K in gain and pay tax on that amount. The only catch is that in 2010 you have no estate tax but do not get the benefit of the stepped-up basis so in our example you would recognize gain on anything over the original 100K less applicable depreciation. Obviously you'll need records for the original purchase and depreciation if death occurs in 2010. In other years you just need a good date of death appraisal.

If you become a co-owner then you have the issue of gift tax. If your parents give you part of the property then you become an owner and your parents may owe gift tax for the transfer. The current gift tax rate is the same as the estate tax rate (45% with a return to 55%). The giver pays the tax for any gift above the annual exclusion amount. Currently you can give up to $12,000 per year to as individuals as you like without incurring gift tax. If you give more then you must file a Form 709 and either pay the tax or use available credit. You can increase the $12K by giving joint gifts as husband and wife and thereby get to 24K and you can do the gifts every year to sort of spread out the gift. If you give over the exclusion amount then you do have lifetime gift tax credit available. You can give up to $1Million over your lifetime without paying gift tax if you file the 709 and take the credit. The catch is that it also counts against your estate tax credit so you need to plan carefully.

Gifting of the property may also uncap the assessment value and cause your property tax to raise significantly so make sure you check on local laws.

You have also have a liability issue. If the property is subject to a mortgage interest then transferring some to you may make the mortgage note immediately payable and this may not be a consequence you want. If you own the property with your parents then it may become property which one of your judgment creditors could seize and your parents could lose out. There are a couple of ways to own the property with your parents. You may be joint tenants or tenants-in-common. If you are joint tenants then your parents have lost all control because you need to sign off on any transaction. If you are a tenant-in-common then you can each sell your interest but it probably has far less value. Make certain that anything you do involves a competent real estate attorney.

By the way, the value issue can work both ways. Properly owned the value of the building for estate tax purposes may be far less than the fair market value on its own. These valuation issues need to be carefully addressed with a competent estate planning attorney working with a NACVA certified valuation but may present real options. You would want to have a discussion with the attorney regarding your goals and overall picture and then explore possibilities like carefully planned family limited liability companies, family limited partnerships, and other business entities which may help you meet all of your goals.

REMEMBER - GET COMPETENT LEGAL HELP. The issues are too great to enter into this sort of transaction without quality advisors.

Answer 2

I assume you do not now own any part of the property, but that eventually it will transfer to you.

Whether or not your parents give you part of the property now, or you inherit all of it, you will have received the property as a "gratuitous transfer" and your parent's estate (not you) may be subject to the estate and gift tax. So if your question is regarding the federal estate tax, gifting part of the property to you will not avoid estate or gift tax that is due, since transfers before and after death have been unified into the "unified transfer tax."

However, if your parent can gift you ownership at the rate of not more than $12K per year, that would reduce the estate and would also be exempt from gift tax.

If you are referring to state inheritance tax, which you, not your parent, will pay, transfer of ownership as a gift may effect the amount of state inheritance tax due. You should consult an attorney in your state and/or the state where the property is located to find out of a transfer of ownership now will benefit you.

Answer 3

Federal estate tax only kicks in if the total value of the estate is over $2 million, so estate tax might not be an issue for you. If you are not on the deed and inherit the property, you would receive a stepped-up basis for the property as of the time you inherited it, which might cut any capital gains taxes you owe if you sell it. If the property is gifted to you, your basis would be that of the person giving it to you, which might increase your capital gains taxes if you sell it.

Depending on where you live, there might be state tax implications also.

Answer 4

No. Your other option is to arrange for the parent to die in the one year that there is no inheritance tax. (I am not suggesting murder, but that year might be the ideal time for some decisions that are not illegal, such as when to terminate life support.)