Legal Question in Wills and Trusts in California

Gifted property counted against unified credit ($625K)

Yes, the property will be removed from the trust (if the trust allows such a transaction, read below), but no, lifetime gifts are also counted against the unified credit amount, minus $10,000 for the annual gift tax exclusion. The unified credit you mention is currently $625,000 per person, and will rise to $1,000,000 by 2008. As you also mention, the gift receiver would get your mother's low basis, whereas he'd get a step-up in basis (to the full market value as of date of death) if he inherited the property. This may or may not be a problem, as the new capital gains tax laws offer other ways to shield himself from capital gains tax. If you're still interested in doing this, you should consult a trust attorney-a couple hours of his or her time would be well worth the money. The attorney can tell you whether the trust would allow such a transaction, whether the trust makes allowances for an "early inheritance," and also how to make the transfer without forgetting anything. The main thing to remember, though, is that when a person makes a gift during her lifetime, the value of the gift that's over the annual exclusion ($10,000) will be counted against the person's lifetime exclusion (now $625,000) if the person chooses not to pay gift tax on the excess.