Dear Mr. Premack: My mother sold her house and moved into independent living. We two sons put the proceeds in a bank account in our names, and used the account to pay all of her bills. The account was down to about $35,000 when mother died. Can sons just divide account up between themselves and that’s all that is done? Do sons have to declare the amount they divided up on their next year’s tax return? There is also about $10,000 in life insurance to get divided between the two sons. – NBG
If we assume that the money was put into the sons’ bank account after mother gave permission and consent for the money to be moved. If mother intended the transfer to be a gift to sons, then 1) mother should have filed a gift tax return at that time to inform the IRS of the transfer, 2) upon mother’s death the son’s may legally keep the remaining money as it is already theirs, and they do not report it as income on their 1040s.
On the other hand, if we assume mom did not give permission or was moved with the understanding that although the account did not have mother’s name on it, the money was still her money and was to be used for her sole benefit? In either case, the money still belonged to mother (in what might be called a “constructive trust”). In that case, there was no gift when the money was moved, so no gift tax return was required. Upon mother’s death, the money would be subject to the terms of her Will; that is, it should be turned over to her Executor to be distributed to whomever mother named as heirs in her Will. Those heirs receive the money as an inheritance, and they do not report it as income on their 1040s either.
The life insurance proceeds were not in mother’s hands while she was alive. The sons, as designated beneficiaries, should make claim against the policy and the insurance company will send them each a check for half the death benefit. Under the Internal Revenue Code, those benefits are also non-taxable, so they are also not reported on the sons’ 1040s.
Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2013) practicing estate planning and probate law in San Antonio.
Original Publication: San Antonio Express News, February 19, 2010