ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, December 30, 1996 TAG: 9612310015
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: MONEY MATTERS
SOURCE: MAG POFF
Q: My parents put their land and house in my name. It is written up as a gift. But I have four brothers, and their will says for it to be divided among us. Must I get a lawyer to do this for me?
A: You should see a lawyer to help sort out the legal and tax ramifications of the actions taken by you and your parents.
If your parents had willed their property to the five of you, your tax base would have been the value as of the date of the second of your parents to die. That would have meant all the gain during their lifetimes would never have been taxed.
But now they have given a gift to you, so you have taken their tax basis. That is the original cost of the property plus improvements. It means you probably will pay high taxes when you sell the property.
Presumably your parents have filed the required gift tax return for the gift in excess of $10,000 - or $20,000 if both of them contributed to the donation. The excess over that amount must be added to the value of their estate for tax purposes.
Their action in making the gift to you alone showed great faith in you. Their will no longer controls the property because they don't own it. You are free either to follow their wishes or to ignore them.
If you divide the property with your brothers, you will be making a gift to them. They will take your tax basis, which is the same as your parents' basis, and you will have to file a gift tax return if the gift exceeds $10,000 per person.
Your parents may want some kind of contract obligating you to divide the property after they die. In any case, you should see a lawyer to determine your present legal status and to help you handle the affair.
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Q: If an older person (over 65) wins the Readers Digest sweepstakes and then dies before the total amount is paid, do the heirs have to pay tax on the entire amount of what has been won even though the entire amount hasn't been paid yet? I once wrote to Readers Digest and got back a form letter that told me absolutely nothing. What is the federal and state law on heirs paying tax on a winning like that?
A: Richard J. Beason of Richard J. Beason CPA in Roanoke said sweepstakes are often paid to the winner over a pre-determined period of years to equal a set amount of winnings. As an example, $1 million is paid to the beneficiary over a period of 240 months, or $4,166.67 a month.
On that person's death, Beason said, the monthly payments normally continue to the winner's heirs or estate, depending on the decedent's will.
The Internal Revenue Service views such periodic payments as an annuity and thereby taxes them as such, Beason said.
As most sweepstakes do not have an investment cost (you do not pay to enter, or in case of the lottery, the cost is $1), each monthly payment received is treated as taxable income. In cases where you have a cost basis in the annuity, he said, the ratable share of the basis is excluded from tax.
On the death of the winner, he said, the remaining monthly installments are subject to two different taxes at both the federal and state levels. The winnings are reportable for income tax and for estate and gift tax purposes.
As to income taxes, he said, the estate or heirs inheriting the monthly winnings are subject to income tax on the receipts in the same manner as the original winner. This income is called "income in respect of decedent" and must be reported on their annual income tax return. The will or other governing instrument determines the owner of the winnings and thereby who must pay the income tax on the receipts.
The estate taxes paid on the value of the annuity also will be allowed as an itemized deduction to the heir. Beason said this deduction is the estate taxes paid by the decedent's estate on the annuity's value allocated over the period the winnings are to be received by the heirs.
As to estate and gift taxes, Beason said, the executor for the decedent must also include the present value of the annuity in the decedent's gross estate for estate and gift tax purposes.
As estates more than $600,000 pay between 18 and 55 percent of their net value to the federal government plus a share to the state, Beason said, estate and gift planning is crucial for a sweepstakes winner.
Beason said there are ways to reduce the tax effects on sweepstakes winnings. Perhaps the most effective is to divide ownership of tickets with spouses and children before the drawing takes place. This spreads the potential earnings throughout the family. However, he said, this also means giving up legal ownership of part of the potential winnings.
After the drawing, Beason said, the use of trusts and other estate and income tax planning devices can help reduce your tax consequences from the winnings. This planning would help reduce the initial income taxes on the winnings received and also help plan the winner's estate to minimize taxes on investment earnings and minimize estate and gift taxes.
For this type of planning, as well as investment and financial planning, Beason said, you should see your certified public accountant or other financial professional.
LENGTH: Medium: 91 linesby CNB