Masonry Magazine October 1989 Page. 26
TAX MATTERS
continued from page 25
Now, suppose your corporation has only common stock, which obviously can appreciate. You give the common stock to your children. Or you sell the stock to them at its fair market value. The gift or sale (or a combination of the two) is a good transfer. But caution is advised. If you retain an interest in the income of the corporation, you can fall into the Section 2036(c) death trap-the value of the stock owned by your children is swept back into your estate.
The language in the notice says that an interest in the income of the business "may be embodied in any form of interest (present or future), agreement, or arrangement, including without limitation, a preferred equity interest in the enterprise, a promissory note, a life or term interest, an employment agreement, a retirement arrangement, a sale agreement, and a lease agreement." That word "future" can be a troublemaker for as long as you live.
The IRS is telling you a proper transfer is okay and can be kept out of your estate. BUT, don't mess around. If you keep an interest string by getting certain income, the Section 2036(c) trap will be sprung. For example, if the owner works for the corporation and takes a salary, there will be no problem. But taking a salary without working, or taking an excessive salary, will not pass an IRS review. Or, leasing property to the corporation at a fair rental will be okay, but if you take an unreasonable rent, it could be held to be an income interest.
Transfer planning is now more important than ever. You must consult a competent professional. Your professional must help you devise a transfer plan that properly deals with Section 2036(c) when it is first implemented. Then, the plan must be monitored every year to make sure that an income interest does not creep into the plan in the future. Mistakes will be paid in high estate tax assessments. Remember, the estate tax brackets go up to 55 percent.
Protect Tax-Free Income When
Selling Your Home
The word "free" is supposed to be the most powerful word in the advertising world. Well, the most powerful word in the tax world is "tax-free." The profit on your home sale can be tax-free if you meet the rules: (1) buy a new home within two years and (2) the new home costs as much or more as the selling price of your old home. If you "build" your new home within two years of the sale, the same tax-free break is available.
Be careful, the meaning of that word "build" is a bit tricky. You must use (move into) your new home within the two-year time limit. This actually happened: Mr. Elam made a large profit when he sold his old residence. He began building a new residence, with a main home and a guest house. Within two years, Elam moved into the guest house with his family. The main home was not ready.
You won't like the decision handed down by the Tax Court. Since the main home wasn't completed, it did not qualify for the tax-free break. What about the guest house? It cost less than the sales price of the old residence, so part of Elam's profit was taxable (Elam, 58 TC 22).
What you must do: Move in before the two-year limitation period has run. If your new dream home still has work to be done, you'll have to decide the value of trading tax dollars for some discomfort.
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