Home inherited by five heirs

[Frank Chapman]

Jurisdiction

Mississippi

By their Wills, parents left a home to their five heirs. There was no Trust involved. It seems the house will have to be Probated.

Four of the heirs are willing to yield their fifth to a single heir who lives in the house now. Would each of the four heirs file a quit claim deed to the fifth?

Would the act of filing the quit claim deed (or a more appropriate process) be viewed as a "Gift" in the eyes of the IRS and therefore be handled accordingly on each of the four heirs tax submissions?

The heir living in the house continues to make mortgage payments perhaps based on the Garn-St. Germain Depository Institutions Act of 1982. However, since only one of the five heirs lives in the home. Would the Act still apply?

No appraisal was made on the house when the parents passed 4 or 5 months ago. Do they only have six months to get such an appraisal in order to take advantage of the stepped-up-basis? And if they continue to delay getting the appraisal, would the stepped up basis be lost and each of the five heirs would have to deal with the total value of the house as capital gain when sold whether or not they transferred their ownership?

To make matters worse, the heir living in the house is now ill. Perhaps not competent to sign any agreement. She has no POA. Since all five heirs are owners of the house, wouldn't that give any of the five the right to speak with the Lender and to be able to deal with the Mortgage Agreement? Would all five have to agree to a change to the agreement or for its termination?

I know this is complicated. I tried to include as many issues as I could think of and I have made suggestions for what I think is right. Thank you for the help!

 

[Tax Counsel]

By their Wills, parents left a home to their five heirs. There was no Trust involved. It seems the house will have to be Probated.

Four of the heirs are willing to yield their fifth to a single heir who lives in the house now. Would each of the four heirs file a quit claim deed to the fifth?

NO! Since it has been less than nine months from the date of date of the parent then the better thing to do is what is known as a qualified disclaimer. Assuming that under the will the fifth kid would get sole title to the house if the other four kids died before the parent died then the effect of the four disclaiming their interest in the house is that the fifth kid still ends up with sole title to the house and the four kids avoid having the transfer count as a gift for federal gift tax purposes. For this to work the disclaimers MUST be provided to the estate personal representative within nine months of the parent's death.

Would the act of filing the quit claim deed (or a more appropriate process) be viewed as a "Gift" in the eyes of the IRS and therefore be handled accordingly on each of the four heirs tax submissions?

If the four kids take their distribution of their share of the home and then do a quit claim deed to the fifth kid then the four are indeed making gifts for federal gift tax purposes. If those gifts along with any other gifts they give that kid during year exceed the current gift tax annual exclusion they'll need to file federal gift tax returns and reduce their lifetime unified credit against gift and estate taxes. That may be important later particularly if some Democrats have their way and that unified credit is drastically lowered from what it is now.

The heir living in the house continues to make mortgage payments perhaps based on the Garn-St. Germain Depository Institutions Act of 1982. However, since only one of the five heirs lives in the home. Would the Act still apply?

Yes.

No appraisal was made on the house when the parents passed 4 or 5 months ago. Do they only have six months to get such an appraisal in order to take advantage of the stepped-up-basis?

No. But the appraisal has to be one that determines the value of the home as of the parent's date of death. The closer to the parent's date of death that you get the appraisal the stronger that appraisal will be should the IRS decide to challenge the basis you determine for the home.

And if they continue to delay getting the appraisal, would the stepped up basis be lost and each of the five heirs would have to deal with the total value of the house as capital gain when sold whether or not they transferred their ownership?

The step up in basis means the basis becomes the fair market value of the home on the date of death of the parent. The disclaimer or quit claim deeds after death would not change the basis.

To make matters worse, the heir living in the house is now ill. Perhaps not competent to sign any agreement. She has no POA. Since all five heirs are owners of the house, wouldn't that give any of the five the right to speak with the Lender and to be able to deal with the Mortgage Agreement? Would all five have to agree to a change to the agreement or for its termination?

Legal competence is not a very high standard. If she is still legally competent then it may be a good idea to arrange for her to execute financial and health care durable powers of attorney now so that you all can help her with financial and medical matters going forward. See an attorney about that for help in assessing and documenting her competence and for drafting the documents you need so that you'll have the best shot at having POAs that others will honor. If you don't get the POAs before she becomes legally incompetent then one of you would need to go to court to be declared her guardian, and that takes time and can be expensive.

 

[adjusterjack]

To make matters worse, the heir living in the house is now ill. Perhaps not competent to sign any agreement. She has no POA. Since all five heirs are owners of the house, wouldn't that give any of the five the right to speak with the Lender and to be able to deal with the Mortgage Agreement? Would all five have to agree to a change to the agreement or for its termination?

All five heirs are not the owner of the home. The estate is. The representative of the estate is the one who would be authorized to deal with the lender and any other estate details. Whoever was nominated by the will should get down to the probate court ASAP and get the papers done.

The representative of the estate would have the authority to make appropriate decisions for the benefit of the estate. He or she would not need the agreement of the other 4.

 

[Frank Chapman]

What great answers and advice.

I've read your advice three times and will read it again.

Since the Will was hastily written (and no Trust was prepared), there was no consideration given to what would happen in the event an heir pre-deceased the remaining parent. But can I assume a Qualified Disclaimer would still allow each heir to refuse acceptance of their share? And could the "personal representative" be one of the heirs that chose to complete a Qualified Disclaimer?

Upon completion of the four Qualified Disclaimers, I assume they would be presented to the Probate Attorney for inclusion with handling of the probate procedure. I would think probate would be when the Qualified Disclaimers became legally binding. Or would they be processed or recorded somehow outside the probate process?

As you suggest, we need to prepare POA's now while we still can.

Thank you so much for the help with this!

 

[Frank Chapman]

All five heirs are not the owner of the home. The estate is.

Between the help of you two people, things are becoming more clear. It sounds as though the probate process could come first followed by the Qualified Disclaimers. I still need to learn how the Qualified Disclaimers are recorded or filed or perhaps just retained by the Executor of the Will.

Thank you for the advice and help with this process.

 

[adjusterjack]

Study the following search results about the MS probate process. Should answer a lot of your questions.

mississippi probate process at DuckDuckGo

Here's the MS statute on disclaimers.

2019 Mississippi Code :: Title 89 - Real and Personal Property :: Chapter 21 - Uniform Disclaimer of Property Interests Act

The disclaimers become part of the probate case file at the courthouse.

 

[Tax Counsel]

But can I assume a Qualified Disclaimer would still allow each heir to refuse acceptance of their share? And could the "personal representative" be one of the heirs that chose to complete a Qualified Disclaimer?

Yes to both of those questions.

Upon completion of the four Qualified Disclaimers, I assume they would be presented to the Probate Attorney for inclusion with handling of the probate procedure. I would think probate would be when the Qualified Disclaimers became legally binding. Or would they be processed or recorded somehow outside the probate process?

The disclaimer needs to be in writing and generally is effective upon delivery and acceptance by the estate personal representative.

 

[Frank Chapman]

Thank you!

I've started the process to distribute Qualified Disclaimer forms to four of the five heirs with instructions to return the completed forms to the executor of the Will. Once she receives and approves the four forms, the fifth heir instantly becomes the sole heir of the estate. No filing or further handling of the forms is required.

I've read about taking possible shortcuts to the probate process ("Muniment of Title"), but since the estate is valued at around $130,000, there is no shortcut to be had. So I've asked the executor to find an attorney in MS to handle the probate proceedings. I've told her to expect to pay around $2,500 for that service. Does my cost estimate seem reasonable?

One concern comes to mind. The reason the four heirs are relinquishing their rights to the inheritance is to help the fifth heir who is the only person living in the inherited house. If three of the four heirs complete and return their forms, that would leave two remaining heirs each to receive 50% of the estate. If the heir who had planned to relinquish his portion were to die, perhaps his children would claim that portion and therefore end up with 50% of the estate and might not be inclined to relinquish their piece. The hastily written Will does not state how the estate should be divided in the event an heir were to pass prior to being awarded their share of the property. Is there a way to remedy that remote possibility rather than to use Quit Claim Deeds that would transfer property directly to the 'target' heir?

Thank you so much for the help with this.

 

[Frank Chapman]

The blank Qualified Disclaimer form template has this heading:

"In the__ Court of __ County"

Since the District is 16 and the County is Jackson, is the following proper?

"In the District 16 Chancery Court of Jackson County"

Thank you.

 

[adjusterjack]

So I've asked the executor to find an attorney in MS to handle the probate proceedings. I've told her to expect to pay around $2,500 for that service. Does my cost estimate seem reasonable?

Assuming an average fee of $300 per hour that's enough for 8+ hours.

If three of the four heirs complete and return their forms, that would leave two remaining heirs each to receive 50% of the estate. If the heir who had planned to relinquish his portion were to die, perhaps his children would claim that portion and therefore end up with 50% of the estate and might not be inclined to relinquish their piece.

Yes, that could happen. You're over thinking the what ifs. Cross that bridge if you come to it.

Is there a way to remedy that remote possibility rather than to use Quit Claim Deeds that would transfer property directly to the 'target' heir?

Sure. But if one heir doesn't want to sign a disclaimer why would he/she sign a quit claim deed?

Since the District is 16 and the County is Jackson, is the following proper?

"In the District 16 Chancery Court of Jackson County"

Sure.

 

[Frank Chapman]

Thanks AJ for confirming my understanding.

But if one heir doesn't want to sign a disclaimer why would he/she sign a quit claim deed?.

The advantage of Quit Claim Deeds is the property is given directly to the target heir -- increasing her portion to 80% if one heir does not comply. Whereas Disclaimers puts the property back into the estate resulting in 50% for each of the two remaining heirs. However, the four heirs have already agreed to sign the Disclaimers. We just have to hope they keep their word.

Well, now there is a bigger issue. I've just been advised that the decedent passed 10 months ago. I've instructed the Executor to proceed with the Qualified Disclaimers even if they were to be completed in 9 months. Any chance we'll be given a break due to Covid? Or does this render the Disclaimer nonviable?

 

[Tax Counsel]

The blank Qualified Disclaimer form template has this heading:

"In the__ Court of __ County"

Since the District is 16 and the County is Jackson, is the following proper?

"In the District 16 Chancery Court of Jackson County"

Thank you.

No, that is not proper. What you do is put the type of court (e.g. circuit court, chancery court, etc) in that first blank. As it is likely that you'll be filing the disclaimer in Chancery Court since that is the court that handles probate matters, you'd put: "In the Chancery Court of Jackson County". While Jack said what you wanted to do was fine, Jack isn't a lawyer and doesn't generally file documents with courts.

 

[Tax Counsel]

Thanks AJ for confirming my understanding.

Well, now there is a bigger issue. I've just been advised that the decedent passed 10 months ago. I've instructed the Executor to proceed with the Qualified Disclaimers even if they were to be completed in 9 months. Any chance we'll be given a break due to Covid? Or does this render the Disclaimer nonviable?

For federal gift tax law purposes the disclaimer has be within 9 months of the date of death of the decedent. This time limit is set in the federal statute that sets out the requirements for a qualified disclaimer, Internal Revenue Code (IRC) section 2518, and the related Treasury regulations. There is no extension for this due to Covid-19. The only Covid related extension for disclaimers was for disclaimers in which the 9 month period would have expired between April 1, 2020 and July 15, 2020. In that case, the disclaimer could be filed by July 15, 2020 and still be good. See the IRS page on Covid-19 Relief for Estate and Gift Tax. That limited relief would not apply to your situation, and even if it did, the extended deadline is long passed.

You can see a local tax attorney who practices estate and gift tax to review all the details of this situation see if there is any possible way that the deadline for the disclaimers is not yet passed, but just from what you have posted so far I'm not seeing anything that would allow for submitting a disclaimer now and have it meet the requirements for a qualified disclaimer.

In short, if it's been 10+ months since the decedent died, it's almost certainly too late for the qualified disclaimer now.

 

[Frank Chapman]

As it is likely that you'll be filing the disclaimer in Chancery Court since that is the court that handles probate matters, you'd put: "In the Chancery Court of Jackson County".

Thank you for the advice! All I knew to do was guess.

 

[Frank Chapman]

In short, if it's been 10+ months since the decedent died, it's almost certainly too late for the qualified disclaimer now.

OK. Thanks again for confirming my fear.

Per the Mississippi Disclaimer act effective July 2020:

"One of the major changes of the Mississippi Disclaimer Act is abandonment of the nine‐ month deadline for disclaimers. A disclaimer still may have to be made within nine months of the decedent's death to be a qualified disclaimer for tax purposes, but a disclaimer can be effective for state law purposes even if it is made more than nine months after the decedent's death."

So that seems to state that the right to inheritance can be relinquished by properly completing the Disclaimer form and filing same with the Executor with no deadline.

If my understanding is correct, no additional form would be necessary to in effect, transfer ownership of property to the 'target' heir directly from the Will. Probate would still be required.

Do you concur with my interpretation of the situation since we've missed the nine-month deadline?

If that is correct, it's not clear to me what the IRS requires. I'm inclined to think a "gift" is being made, but that doesn't make a lot sense because to whom or what would the gift be given?

Thank you again. Hopefully, we are getting close.

 

[adjusterjack]

If that is correct, it's not clear to me what the IRS requires. I'm inclined to think a "gift" is being made, but that doesn't make a lot sense because to whom or what would the gift be given?

Whether it's been conveyed by the estate or not, A, B, C, D, and E each have a 1/5 interest in the value of the property.

When A, B, C, and D disclaim their inheritance, each 1/5 is a gift to E for IRS purposes. A, B, C, and D would each have to file a gift tax return showing the amount that each has gifted to E. There would be no federal tax due because the amount would be well within the lifetime gift tax exclusion which is currently $11,700,000. Biden wants to reduce that to $1,000,000. Unlikely to happen but if it does it wouldn't effect your situation unless you plan on giving away millions over the next few decades.

 

[Frank Chapman]

When A, B, C, and D disclaim their inheritance, each 1/5 is a gift to E for IRS purposes. A, B, C, and D would each have to file a gift tax return showing the amount that each has gifted to E..

Thank you!! Makes sense. I figured the 709 would be in the picture, but I didn't know that a relinquishment would be considered a gift to 'E'.

It would seem that each heir's gift would become effective at the time when the Executor acknowledges receipt of each heir's Disclaimer. (?)

Further, it would seem that heirs cannot file their 709 until probate is complete because the actual value of each portion won't be known until property values and probate costs are finalized. (?)

Hate to hear about the '$1,000,000 exclusion' change, but I figured that was coming.

Again, thank you for your expertise and patience AJ!

 

[Tax Counsel]

So that seems to state that the right to inheritance can be relinquished by properly completing the Disclaimer form and filing same with the Executor with no deadline.

Yes, that is what it says, so the disclaimers might still be worth doing as a way to achieve the goal of getting the property transferred to the one sibling still living in the house even though it wouldn't achieve the desired tax outcome of avoiding a gift for gift tax purposes.

If my understanding is correct, no additional form would be necessary to in effect, transfer ownership of property to the 'target' heir directly from the Will. Probate would still be required.

Right, probate is still required regardless since the home is an asset of the decedent's estate. Your issue is how to best ensure that the property goes from the estate to the person you all want to get it.

If that is correct, it's not clear to me what the IRS requires. I'm inclined to think a "gift" is being made, but that doesn't make a lot sense because to whom or what would the gift be given?

It's not a matter of what the IRS requires, but what Congress requires. Congress wrote in the 9 month limit for disclaimers because it wanted a national standard for what would count as a disclaimer for federal gift tax purposes rather than relying on state law, which would create 50 different rules for what is effective for a disclaimer. So the federal rule is that the disclaimer must work under state law but also imposes some additional requirements, in particular the nine month requirement. By the way, that nine month period was not chosen arbitrarily. It was chosen because nine months after death is also the deadline for the estate to file its estate tax return, and the estate would need to know what disclaimers are being made to prepare that return.

The effect of missing the nine month deadline here is that each beneficiary making the disclaimer is treated as making a gift to the fifth sibling in the amount of the value of the share of the property that is being transferred. It is exactly the same tax result that would occur if the four siblings did quit claim deeds rather than disclaimers.

 

[army judge]

I'm inclined to think a "gift" is being made, but that doesn't make a lot sense because to whom or what would the gift be given?

First and foremost, please accept my sincerest condolences upon the recent passing of your parents. I pray you be allowed to grieve and mourn their passing in peace, as you endeavor to go on with your lives.

Have the siblings discussed placing the real property into a "family trust" (or other applicable trust)?

It could be useful to avail yourselves of a free consultation with an attorney that practices in the area of trusts to see if that avenue might be more beneficial to the surviving siblings.

 

[Frank Chapman]

By the way, that nine month period was not chosen arbitrarily. It was chosen because nine months after death is also the deadline for the estate to file its estate tax return, and the estate would need to know what disclaimers are being made to prepare that return.

All great information and explanations!

The 1041 was not filed. And now that deadline is passed as is the time for extension. So, it would seem that if all goes well, we'd file the first and final 1041 at close of probate. We won't know what the total value of the estate after costs will be until after probate. And I don't believe there will be any tax due so filing late won't result in penalties (?? I hope)

thank you for your time and input.