Are payments for a friend's home repair considered part of their taxable estate if the giver passes away within three years?
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To determine whether payments made for a friend's home repair are included in the giver's taxable estate if the giver dies within three years, we must analyze the relevant provisions of the Internal Revenue Code and supporting IRS guidance.
1. Was the Payment a Gift?
Under the gift tax rules, a "gift" is any transfer to an individual, directly or indirectly, where full consideration (measured in money or money's worth) is not received in return. If the giver paid for a friend's home repair without expecting repayment or something of equal value, this payment is considered a gift for federal gift tax purposes.
2. Is the Payment Included in the Gross Estate Under Section 2035?
Section 2035(a) provides that if a decedent made a transfer of an interest in property (by trust or otherwise) or relinquished a power with respect to any property during the three-year period ending on the date of death, and the value of such property would have been included in the decedent's gross estate under sections 2036, 2037, 2038, or 2042 if the interest or power had been retained, then the value of such property is included in the gross estate.
However, Section 2035(a) only applies to transfers that would have been included in the estate under those specific sections (2036, 2037, 2038, or 2042) if retained. These sections generally deal with transfers where the decedent retained some interest or control (such as a life estate, reversionary interest, or incidents of ownership in life insurance). A simple gift, such as paying for a friend's home repair, where the giver retains no interest or control, does not fall under these sections.
3. Is the Gift Tax Paid on the Transfer Included in the Gross Estate?
Section 2035(b) states that the gross estate is increased by the amount of any gift tax paid by the decedent or their estate on any gift made by the decedent or their spouse during the three-year period ending on the date of death. This means that if the payment for the friend's home repair was large enough to require the filing of a gift tax return and the payment of gift tax, the amount of gift tax paid would be included in the decedent's gross estate if the decedent died within three years of making the gift.
4. Is the Value of the Gift Itself Included in the Gross Estate?
For a simple gift (such as paying for a friend's home repair), the value of the gift itself is not included in the decedent's gross estate solely because it was made within three years of death, unless the transfer falls under the retained interest or control provisions of sections 2036, 2037, 2038, or 2042, which is not the case here.
5. Summary
- The payment for a friend's home repair is a gift.
- The value of the gift itself is not included in the decedent's gross estate solely because it was made within three years of death, unless the transfer involved retained interests or powers (which does not apply here).
- If the gift was large enough to require payment of gift tax, the amount of gift tax paid on the gift is included in the decedent's gross estate if the decedent dies within three years of making the gift.
- If no gift tax was paid (for example, if the gift was under the annual exclusion or covered by the lifetime exemption), nothing is included in the estate under section 2035(b).
6. Conclusion
Payments for a friend's home repair are not included in the giver's taxable estate if the giver passes away within three years, unless the payment was subject to gift tax and gift tax was paid. In that case, only the amount of gift tax paid is included in the estate, not the value of the gift itself.
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