Q: As an unmarried trustee for a small (approximately $1 million) family revocable trust, I am considering a long-term relationship with a widowed friend, who also possesses a family trust. We wish to maintain separate trusts. Predictably, my home is the major asset in my trust -- with the remainder being CD's, annuities and cash.
What are the tax implications if I wish to sell my house and distribute the proceeds among my five children as part of their inheritance? I understand that the IRS has a $14,000 per year gift consideration, but what if I choose a larger amount, say $100,000 per child? Help.
A: You are absolutely correct that you can gift up to $14,000 per year to each of your children (and their spouses and to your grandchildren, if you wish), without having to file a federal gift tax return.
If, however, you gift anything in excess of that amount to a recipient, federal law requires you to file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
At the time you file the return, you do not pay any taxes and your estate will not be subject to a gift tax at the time of your death, unless you exceed the current maximum on taxable lifetime gifts, which is $5.25 million if you were to die in 2013. Note that the $14,000 per year annual exclusion amount does not count towards this $5.25 million lifetime exclusion.
Another tax consideration is whether there will be a capital gains impact resulting from the sale of your residence. If the gain on the sale of the residence is $250,000 or less, you are eligible for an exclusion from capital gains tax if you have owned and used the residence as your principal residence for at least two years out of the five years prior to its date of sale. Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your principal residence.
In addition to the potential for capital gains tax, certain home sales are subject to a 3.8% Medicare tax for homes sold after January 1, 2013. If the gain on the sale of your home is more than $250,000, you may be subject to the 3.8% Medicare tax, depending on whether your adjusted gross income exceeds a threshold amount.