The key to reducing estate taxes is to make a gift without retaining any rights.
The Internal Revenue Service was deadly serious in ruling a man's home should be included in his taxable estate, even after he had transferred title.An elderly man made a gift to his children with the understanding that he could continue living there rent-free. The IRS ruled that such an agreement, although informal, causes the property to be taxable in the father's estate. When a donor retains the right to continue using property given away, the property is included in the donor's estate at death.
The way the Barlow family conducted business before their father's funeral prompted the IRS to raise a death tax question.
The parents gave their four children 372 acres of their farm in Nueces County, Texas. They then signed an agreement to pay the children one-third of grain crops and one-fourth of cotton crops - the customary rental paid by tenant farmers.
After two years of planting and harvesting, the parents ran into some bad luck.
It all began when Mrs. Barlow backed her car out of the driveway, seriously injuring her husband. He was hospitalized for six weeks and she required psychiatric care for an extended period.
The children agreed they wouldn't collect rent until their parents' circumstances improved.
After Barlow died four years later, circumstances got worse because the IRS got involved. The Green Reaper claimed the transferred land was not a completed gift so it should be included in his taxable estate. The IRS argued it was incomplete because the Barlows didn't pay rent as agreed; they continued to benefit from the property as if they owned it.
The Barlow children protested to the Tax Court.
The judge admitted the law usually "sweeps into the taxable estate" assets where title is transferred but use or enjoyment is retained. The Barlows, however, did give up their rights in the 372 acres. To use the property they were obligated to pay rent. They did, in fact, pay rent for two years until the family tragedy occurred, which was unforeseen.
The judge ruled the transfer was a completed gift so the land was not taxable in Barlow's estate.
THE MORAL: The least taxing gifts of all come from the heart.
When Elizabeth Kitchin died, her husband William and daughter Mary Eisenman inherited White Hall, a mansion with 147 acres of farmland. Kitchin transferred his interest to his daughter. In return, Eisenman paid him market value for his equity and she also agreed to provide her father with a home for the rest of his life.
Kitchin, an alcoholic for about three years, lived in part of the Dunkirk, Md., manor home.
Eisenman and her husband reimbursed him for the loans and thought that ended the matter. They were shocked two years later to receive another letter from Kitchin claiming he was not fairly compensated for the purchase of White Hall.
Eisenman thought her father had slipped his trolley, so she ignored the letter.
After his death, she learned she'd been cut out of his will and the IRS was trying to increase his taxable estate by the value of a one-third interest in White Hall. The agency said Kitchin had retained the right to live in the house.
A Tax Court judge, however, said Kitchin received adequate compensation when he sold the property. Eisenman paid for every room, closet and hall, no matter the color. Because the transfer was a sale, the property was not included in Kitchin's estate.
THE MORAL: A debt paid in full leaves no room for will-full abuse.