Gifting Farm Assets to a Dying Spouse for a Full Step-Up
Powerful, and Full of Traps
Here is the situation I get asked about more than any other in a terminal diagnosis. A couple owns 1,000 acres in joint tenancy. They paid $500 an acre in 1978. It is worth $12,000 an acre today. The husband has been given six months to live. In a separate property state, when he dies only his half of that land gets a new basis. The wife keeps her old $250,000 basis on her half, and if she ever sells, she pays tax on roughly $5.75 millions of gain that could have disappeared.
There is a fix, and it is a good one. But it comes with a one-year clock and a list of ways it can blow up on you.
The technique
The healthy spouse gifts appreciated property to the terminally ill spouse. Under Section 2523, gifts to a U.S. citizen spouse qualify for the unlimited marital deduction, so there are no gift tax and no exemption used. The ill spouse now owns the property outright. When they die, it is in their gross estate, and under Section 1014 it gets a basis equal to fair market value at date of death. Their will or trust leaves it back to the surviving spouse, which qualifies for the marital deduction at death, so again no estate tax.
The survivor ends up owning the same property they started with, now carrying a full stepped-up basis instead of half of one.
Run the numbers on the example above:
