Ask the Probate Judge—More on TODDs
Rudd, appeared November 2,, 2006, Albuquerque Journal, Business Outlook
Reprinted with permission
Editor's note: This column may not be quoted or reproduced in whole or part without express written permission of the author.
Q: If I have a Durable Power of Attorney, do I still need a Transfer on Death Deed (TODD)? M.N., Albuquerque
Durable powers of attorney and TODDs are two entirely different legal documents.
Durable powers of attorney give someone else legal authority DURING YOUR LIFETIME to make your business and/or health care decisions, usually if you become incapacitated.
The TODD, created and recorded during your lifetime, transfers ownership of a house to beneficiaries named in the TODD. TODDs only become effective upon the death of the owner of the house.
Most powers of attorney do not include the power to create a TODD on behalf of the homeowner, and title companies generally are reluctant recognize a TODD executed by someone other than the owner of the house.
Q: I read your articles on transfer on death deeds with interest. I would like to know what, if any, are the tax consequences of a TODD to the recipient? Assuming there is only one child to whom the transfer is made, does that child acquire a tax liability on the value of the property to be paid when the transfer is made? Or does he or she acquire the property free of gift or income tax to the state or federal government? R.C., Albuquerque
The general rule is that a decedent's assets are valued at their fair market value at the time of the decedent's death. This increase in value at death is called the "stepped-up basis."
I believe that real property transferred via a TODD receives the same stepped-up basis as other inherited property. Whatever your house is worth at your death should be the value it is assigned for estate tax calculation purposes.
At this time an individual can pass $2,000,000 without federal or state estate tax consequences. With proper tax planning, married couples can pass up to $4,000,000 without estate tax liability.
Inheritances are specifically excluded from the definition of income under the Internal Revenue Code, so income tax is usually not owed on inheritances. Your house should pass to your child free of gift or income taxes.
Q: I'm 82 and I have set up a TODD for my house to my four children. I believe also that my stock is "Transfer on Death" to them. My question is if I transfer stock to each of them as a gift while I'm living, will I be limited to $10,000 each per year, and will they assume my tax basis if/when they sell the stock? P.Y., Albuquerque
Well, the good news is that the $10,000 annual gift tax exclusion has increased to $12,000 in 2006. I don't know if this amount will increase again in 2007.
You can gift any amount to any number of people. But if the value of the gift exceeds $12,000, then you should file an IRS Form 709, Gift Tax Return, that reports the gift.
Gifts made while you are still alive have your original cost basis. So, yes, children who receive your stock as a gift during your lifetime would be responsible for any capital gains from the time you purchased the stock until the time of sale.
If, on the other hand, your children inherited the stock upon your death, they would receive the "stepped up" basis mentioned in the above question, and the stocks would be valued at their fair market value at the time of your death. Capital gains tax, if any, would only be owed on appreciation between the date of death and date of sale.
© 2006, Merri Rudd & Albuquerque Journal, All Rights Reserved