Even Small-Estate Owners Benefit From Advice on Property Transfers
Q: What do you do when someone with no assets dies? My father signed over (“quit-claimed”) his house to my brother shortly before passing away last year. The value of the property was about $65,000. I disposed of his personal belongings, which were few, but did not seek a lawyer about handling probate or tax matters. He had not filed a tax return since 1990, because he had not received any taxable income. Now I am concerned that gift taxes should have been paid on the property transfer.
Are there things I should have done or forms I should have filed when my father died?
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A: Yes, there were, but you probably don’t need to worry. As obnoxious as the IRS can be toward taxpayers, there’s not much more blood it can squeeze from this particular stone.
On the other hand, your brother might have a bone to pick with your dad in the afterlife. By giving him the property rather than bequeathing it at death, your father also gave your brother a completely unnecessary tax bill.
When you receive property as a gift and then sell it, you have to pay taxes using the giver’s tax basis. In other words, if your dad paid $20,000 for the house, that would be your brother’s tax basis, and he would owe taxes on $45,000 of profit.
If your dad had waited and given your brother the property in his will, your brother’s tax basis would have been the value of the property on the day your dad died. It’s quite conceivable that Bro wouldn’t have had to pay taxes at all.
Your dad may have heard that quit-claiming property to your brother would avoid probate, a court process that can be long and potentially expensive in California. But since his estate was worth less than $100,000, it wouldn’t have had to go through formal probate anyway.
This goes to show why even people with small estates should get some good advice before disposing of, or changing title on, their property.
Now, on to your troubles.
You don’t have to worry about filing either an income tax or an estate tax return for your dad. He didn’t owe any income taxes, and his property wasn’t worth anywhere near the minimum for estate taxes to apply. The minimum in 1997 was $600,000, and it is scheduled to increase to $1 million by 2006.
Your dad should have filed a gift tax return, but that’s probably a moot point.
Anyone who gives away more than $10,000 to any one person in a year is supposed to notify the IRS. Gift taxes aren’t owed, however, until the value of the gifts given away in a lifetime exceeds the estate tax exemption amount--again, $600,000 in your father’s case.
The chances of the IRS’ discovering this omission are pretty slim. Your brother could get audited, which could set the IRS on your father’s trail and thus lead them to your door, since you were the executor of his estate. But since there’s no tax owed, the IRS is unlikely to go after you simply to collect a small failure-to-file penalty. If you want to be absolutely safe and correct, file the darned thing and pay the fine; otherwise, get on with your life. And make your brother buy you dinner, at least.
Keep Some 401(k), IRA Summaries
Q: How long should I keep my 401(k) and IRA statements?
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A: You can toss all those old 401(k) summaries; just keep the last year’s worth in case you have to prove your wealth to some lender. If it makes you nervous to toss everything, keep the annual summaries; then you can trace the rise (or fall) of your retirement kitty on some rainy afternoon.
Regular IRAs are only slightly more complicated. You’ll want to hang on to your annual summaries, and also any statements that deal with rollovers, at least until the IRS statute of limitations is up (three to seven years).
The same goes for the tax returns where you noted which contributions were deductible and which were nondeductible. The nondeductible contributions will eventually be subtracted from your total IRA accumulation to determine your tax bill. That rolling figure should be reflected on each year’s tax return, on Form 8606, so technically you can toss your returns after the threat of audit has passed.
But many accountants will tell you to simply hang on to all your tax returns--since you never know when they will come in handy. People have used old tax returns to contest erroneous Social Security records, for example. That alone could make the storage hassle worthwhile.
Timely Tip on Saving Money
A request for money-saving ideas provoked a torrent of reader responses. Many have been posted on the Times’ Web site, and you can now join the discussion and add your own ideas. Visit https:// www.latimes.com/HOME/BUSINESS/PERFIN/.
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Liz Pulliam can be reached by e-mail at liz.pulliam@latimes.com.
