life estate

[dcjames]

i live in south carolina. my husband and i have been deeded a home and 2 lots in north carolina by my in-laws who have a life estate. the property is worth between $250,000 to $350,000.

recently the executor to be and current holder of the power of attorney has been pressuring us to sign the deed back over to my in-laws so that they may take a reverse mortgage on the property. the property is currently mortgaged for around $85,000. he insists that we will owe a huge gift tax at the time of my in-laws death and wants to put the property in a trust for us instead.

my in-laws deeded this property to us because they wanted to make sure that we would receive it at their death without any controversy.

will we owe this large gift tax as he says at their death or if there is a tax will the estate be responsible for the taxes or will some type of tax only be due if we sell it. i thought that gift taxes were payable by the giver not the receiver.

we feel that we have no guarantee that the property will actually be put in a trust once we sign it over. what will keep us from owing a tax at the time of death even if it is in a trust? With a reverse mortgage who is going to pay all of these debts back once my in-laws pass?

their complete estate is approximately 2 million in value.

we are completely ignorant in this area and need all the advice that we can get. Many thanks.

 

[ALawyer]

This is really a family relations problem, that is being clouded by really secondary so-called legal and tax issues.

Your inlaws gave you what is essentially a $200,000 future gift (the mid-range of the estimated value of the property, less the mortgage) taking a life estate in it. A gift tax return should have been filed, but no tax would be payable by anyone yet (unless they had made other gifts over $20,000 in any 1 year to any 1 person jointly).

It would be really easy to plan their estate to totally escape estate taxes (which rise to $1 million per decedent on 1/1/2002), regardless of the property, and increases more in future years. (An A B Trust is one way to handle it)

If they take out a reverse mortgage they will esssentially be selling the house to the reverse mortgage company (depending on the type of deal they do) and getting an income stream for life. That may or may not make sense for them. A lot depends on the terms and costs of getting the reverse mortgage.

But here what is clear is that they want it back. They may have improvidently deeded it to you, or may have been convinced now it was inappropriate.

Depending on how many kids they have, and other inteded beneficiaries, if you don't give it back they may cut you guys out of the will completely, and in any event it would severely strain your family relationships.

You may want to look into the role the advisors executor is playing. Does he get a commission or any benefit from the reverse mortgage? One thing to ask the lawyer -- would giving it back change the tax consequenses -- or once the gift it made is that it -- and would gifting hte property back possibly create a major tax consequence for you and your wife and require you to file returns and use up part of YOUR lifetime exclusion.....