If you need a break from talk of the coronavirus, stock market crash, and politics, I highly recommend Season 10 of Larry David’s Curb Your Enthusiasm. Once you get past cringing at Larry’s social fumbles, it’s great entertainment. As he always has, in Season 10, Larry takes on the problems and annoyances of everyday life in a laugh-out-loud way. In fact, the most recent episode (Season 10, Episode 8) includes an Estate Planning storyline.
Here is what happens. Larry and Cheryl meet up at Jeff’s house. Cheryl tells Larry that her sister, Becky, is selling the house Larry and Cheryl gifted to her fifteen years ago. Becky is Cheryl’s down-on-her-luck sister – a self-dubbed “Princess Margaret” to Cheryl’s “Queen Elizabeth”. When Larry finds out Becky is selling the house at a profit, he gets annoyed. He tells Cheryl the profit should be his. He then goes directly to Becky and proposes another solution – he’ll recoup his investment from the sale proceeds, and she can keep the profit.
All three women (Cheryl, Becky and Susie) argue that Larry did not retain the right to keep the profit or recoup his initial investment. “You gave it to her. It was a gift,” says Susie, brashly. The women argue with Larry on principle, but they are also right under Estate Planning law.
Presumably, Larry and Cheryl filed a gift tax return when they gifted the house to Becky. They made a completed taxable gift and deeded the house to her (or perhaps to a trust for her benefit). Larry can’t take back the gift, or any part of it, including the profit. Larry can’t have retained an interest in the house. If he had retained an interest, the gift would be incomplete. Furthermore, under Section 2036 of the Internal Revenue Code, the full value of the house would be includible in Larry’s estate on his death and subject to federal estate taxes. (California does not have a state estate tax, although many states, including Massachusetts, still do.) Because Larry has a very large estate, inclusion of the full value of the house in his estate would be a bad result. That’s not “pretty, pretty good”.
For those with substantial estates, making gifts to family members is an important estate planning strategy. We can advise you about the best way to make gifts and minimize estate taxes.