Estate planning can seem like a simple process--but usually only when it works as intended. A well-designed plan can make the passing on of assets and handling of various end-of-life matters occur seamlessly. Alternatively, when there is no planning or only partial steps are taken, then the true complexity of the situation becomes clear. In other words, it is only when things do not go correctly that many appreciate the value of this work. But by then it is usually too late.
For one thing, many steps have unintended consequences. Consider inheriting a home. This seems like a straightforward task that is relevant for many families. The home is the largest single asset for many New Yorkers. Determining what happens to the property upon the owners death is an obviously critical step. But tangential effects of the step must be understood.
For example, what are the tax consequences for the one who inherits the home?
Last week, the U.S. Tax Court ruled on a case, Gary Herring v. Com. of Internal Revenue. The case hinged on the definition of "first time home buyer" in the U.S. Internal Revenue Code and the effect that inheriting a home has on one's ability to fit that definition. The general issue was that the IRS claimed that a man owed money (a tax deficiency) because he improperly claimed a first-time homebuyer exemption on a recent return. The taxpayer challenged that determination.
The facts of the case are somewhat convoluted but according to the court opinion, the man inherited a one-third interest in a family home about eighteen years ago upon his mother's death. The home was owned by himself and his two other brothers.
While the legal analysis is complex, the court essentially ruled that the one-third interest in the inherited house barred the man from claiming to be a first-time homebuyer on a subsequent property he purchased twelve years after inheriting. The opinion is somewhat unclear on whether the man's living in that inherited property for a few years as a primary resident affected its determination. In other words, if the man only inherited one-third interest and never actually lived in the home, the ruling may have been different.
Regardless, this case is an example of one of many countless issues that are often tied up in inheritance and estate planning matters. None of this means that one should allow such issues to determine inheritance decisions. But it is a reminder of the need to carefully think through all implications, preferably with the aid of experienced attorneys who understand these matters.