My two sisters and I inherited the family farm, which we are preparing to sell. The will says "I give all my property to my three daughters ... share and share alike." We also have a lady bird deed (reserving life estate) that states, "property is conveyed in equal, undivided interests as their separate property." I have two children. My sisters have none. So, they have agreed to give me one-half (one-fourth to each sister) instead of one-third of the farm proceeds. My sister thinks she may incur gift tax on the amount above one-third, so she wants to divide the sale proceeds equally at closing, then gift the extra to my kids at the allowed annual rate for however many years it takes. My question is, would my sisters incur gift tax if we split the proceeds one-half, one-fourth, and one-fourth instead of each getting one-third?
If my understanding is correct, you and your sisters want the proceeds to be split one-fourth to each of the three sisters and one-eighth to each of the two grandchildren (although you didn’t mention that you would be making gifts to your children). Your plan to receive one-half implies that you would then gift one-half of your inheritance to your children, so that you end up with the same amount your sisters received. The problem is that this agreement does not follow the wishes of your parent, as provided in the will or deed as described. You can achieve the same result by doing as your sister suggests.
Estate laws are generally controlled by state law. Lady bird deeds (also known as Enhanced Life Estate Deeds) are only permitted in 15 states. Pennsylvania is not one of them. My conclusion is that you are asking this question for an estate in another state, for which I cannot profess expertise. However, I can provide general information about the rules for wills and estates. I recommend checking with the attorney that prepared the will and deed, or the estate attorney, regarding applicable state laws. To be clear: the following is not legal advice, but may provide some useful basics regarding the topic.
Although there are differences between states, there may be some uniformity too. Generally, an executor is appointed in the will. In Pennsylvania, the will is filed in the county courthouse where the decedent resided, and the executor or administrator is named by the Register of Wills. The will is the governing document, and the executor is legally obligated to follow the terms of the will. There is a breach of fiduciary duty if the executor fails to carry out the instructions in the will; the county court may be petitioned to remove the executor or force the executor to carry out his or her duty. To avoid potential legal liability, the executor must keep the beneficiaries informed, and keep complete records of all transactions.
In Pennsylvania, relevant laws are posted on the Pennsylvania General Assembly website. This lengthy section includes the requirement for distribution to residuary and remainder beneficiaries of their fractional share. A residuary bequest is the amount that remains once all the creditors have been paid and all the bequests have been paid. Based on your description of the facts, in Pennsylvania the executor would be required to distribute one-third to each of the three daughters (residuary beneficiaries), since neither the will nor deed mention the offspring. You and your sisters may then gift the agreed-upon amount to your two children. For 2018, the annual gift exclusion is $15,000 per donee. If gifting more than $15,000 to any donee, a gift tax return would be required. Tax would be owed only if total gifts, less the total annual exclusion amounts, exceeded $5.6 million (the individual estate tax credit amount). Any excess gifts are applied toward the Form 706 Estate Tax credit. Therefore, in most cases, a gift tax return is filed for information purposes only, with no tax due. Form 709, Gift Tax Return, and its instructions are available at www.irs.gov. Publication 559, Survivors, Executors, and Administrators, may also be helpful.
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Answered by: Nancy G. Montanye, CPA, is a sole practitioner in Williamsport, Pa.