My father-in-law left land to my mother-in-law, stating that it goes to the kids. A conflict has erupted. Now she wants to sell it so the kids will quit fighting. My mother-in-law is saying she wants the checks made to the kids separately. Would it be better tax-wise for her to just sell it and split the money, and if there are any federal or state taxes to be paid, just let the kids give her the money?
Inherited real estate and land can be tricky. Should the recipient sell?
Quite often when people inherit land, they often want to sell the property. And in the question above, was the land really left to the wife, with the hope and suggestion that she would later give it to the children, or was it left to the wife to be held for the children? Who is the real owner? Is it in a trust, or some similar arrangement?
Whether or not you mention that possibility in your will has important tax consequences for your children as mentioned by FOX Businessin a recent article titled "How to Deal with Disputes Over Inherited Land."
As the article notes, if the sale of the land is directed in the will with the proceeds to be split between heirs (children for example), then the land is still treated as property of the estate and any taxes are paid by the estate (yes, the estate itself pays income tax, usually at the highest possible rate). But at death, there is a “step up in basis” (if the property has gone up in value) benefit for capital gains tax purposes. This benefit is determined by the value at the date of death (usually) and is applicable whether sold by the estate or by the heirs.
However, if the sale is not directed in a will, then the heirs have to pay the taxes out of their respective shares of the proceeds. But if it was left to the wife, and she sells it, she owes the tax, even if she turns around and immediately gives the proceeds of the sale (or even directs that the checks be issued) to the children.
Another difference is that if the sale is directed, the costs of sale may be deductible for estate tax purposes, while not deductible for those purposes if a sale is not mandated.
Finally, if one person is left the property and decides to sell it to give the proceeds to the others, there are gift tax issues that need to be considered.
When leaving any type of land to your heirs, you need the assistance of an experienced estate planning attorney to make sure it is done in a manner that will minimize potential taxes. Like most parts of life, planning in advance, with a knowledgeable professional, can save substantially down the road.
Reference: FOX Business (November 4, 2014) "How to Deal With Disputes Over Inherited Land"