TN 1 (07-05)
PS 01405.006 California
A. PS 05-172 When Inherited Property Becomes Income or a Resource under Title XVI
DATE: June 1, 2005
The recipient and his sister inherited their mother's home in California upon her death in April 2002. On April 18, 2003, escrow closed on the sale of the property and a check for $23,793.22 was issued to the recipient. However, the recipient alleges he did not receive the check until May 2003. The issue is whether the $23,793.22 was income in April 2002, the date of the mother's death, or in May 2003, the date the recipient actually received the inheritance.
In California, an individual has an alienable property interest, whether it is an interest in the actual property inherited or a beneficial interest in the estate, as of the decedent's death. This interest constitutes income as of the date of death, and a resource in subsequent months, although the value of the individual's interest may be difficult to determine in some instances. The market value of an asset may be greatly reduced and difficult to determine as long as the asset remains subject to probate proceedings. Thus, it is a close issue as to whether inherited property should count as income or resources prior to closing of probate proceedings. It is preferable to count inherited property as income and resources only after the earlier of the closing of probate proceedings or the recipient's actual receipt of the inheritance.
You asked when inherited property becomes income, and thereafter a resource, under state law, for Supplemental Security Income (SSI) purposes. In this case, the question arose under California state law, as the decedent's real property was located in California. However, the rationale in this case may apply to cases from other Region X states as well, depending on the probate laws in each state.
In California, an individual has an alienable property interest, whether it is an interest in the actual property inherited or a beneficial interest in the estate, as of the decedent's death. This interest constitutes income as of the date of death, and a resource in subsequent months, although the value of the individual's interest may be difficult to determine in some instances. The market value of an asset may be greatly reduced and difficult to determine as long as the asset remains subject to probate proceedings. Thus, it is a close issue as to whether inherited property should count as income or resources prior to closing of probate proceedings. We conclude that it is preferable to count inherited property as income and resources only after the earlier of either the closing of probate proceedings or the recipient's actual receipt of the inheritance.
This opinion request arises from an Internal Revenue Service alert which was generated when income records for an SSI recipient showed that his 2003 income was $30,333. The recipient lives in Idaho and his mother, who owned property in Bakersfield, California, died in April 2002. It is assumed that the decedent was a resident of California. The recipient's sister is the other heir to the decedent's estate. On April 18, 2003, escrow closed on the sale of the Bakersfield property and a check for $23,793.22 was issued to the recipient. A field office counted the $23,793.22 inheritance as income to the recipient as of April 2002. Thereafter, a New York ROQA office communicated with the recipient, who stated that he had not received the $23,793.22 check until May 2003. The issue is whether the $23,793.22 qualified as income in April 2002, the date of the mother's death, or in May 2003, when the recipient actually received the inheritance income.
Section 1102 of the Social Security Act (the Act), 42 U.S.C. §1302, provides that the Secretary of Health and Human Services "shall make and publish such rules and regulations, not inconsistent with this Act, as may be necessary to the efficient administration of the functions with which [she] is charged under [the] Act." Regulations promulgated under the Act provide that an aged, blind, or disabled individual with no spouse is eligible for benefits under Title XVI if his nonexcludable resources do not exceed $2,000 as of January 1, 1989. See 20 C.F.R. § 416.1205(c). A resource, for SSI purposes, includes assets that an individual owns and could convert to cash to be used for his support and maintenance. See 20 C.F.R. § 416.1201(a). If the individual has the right or power to liquidate the property or his share of the property, it is a resource. See 20 C.F.R. § 416.1201(a)(1).
An inheritance is considered unearned income at the earliest of when it is received, credited to the individual's account, or set aside for the individual's use. See 20 C.F.R. § 416.1123(a). Absent regional instructions explaining the effect of individual State laws, it is assumed that an individual receives income at the earlier of either the date the individual alleges receiving the inheritance or the date the estate is closed. See Program Operations Manual Systems (POMS) SI 00830.550.
Under POMS SI 01120.215(B)(2), an individual is deemed to have an "ownership interest" in an unprobated estate if: (1) documents, such as a will or court records, indicate that the individual is an heir to the property of the deceased; (2) the individual has use of the property or receives income from it; or (3) the individual is related to the decedent such that he is entitled to a share of the property under state intestacy laws; and the inheritance, use of income, and distributions are uncontested. See POMS SI 01120.215(B) (2). The Social Security Administration considers that an inheritance is a "resource" in the month following the month in which the inheritance met the definition of income. See § SI 01120.215B.3.
20 C.F.R. § 416.1201(b) defines a "liquid resource" as:
cash or other liquid assets or any real or personal property that an individual . . . owns and could convert to cash to be used for his support and maintenance. If the individual has the right, authority or power to liquidate the property, or his share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual or spouse.
20 C.F.R. § 416.1201(c) defines a "nonliquid resource" as:
property which is not cash and which cannot be converted to cash within 20 days . . . . Examples of resources that are ordinarily nonliquid are loan agreements, household goods, automobiles, trucks, tractors, boats, machinery, livestock, buildings and land. Nonliquid resources are evaluated according to their equity value[.]
The "equity value" of an item is "the price that item can reasonably be expected to sell for on the open market in the particular geographic area involved less any incumbrances." See 20 C.F.R. § 416.1201(c)(1) and (2). Thus, the equity value of the recipient's deemed "ownership interest" in the Bakersfield, California property could be counted as income to him on the first day that he could have liquidated it, i.e., the date of decedent's death.
California Probate Code § 7000 provides that "title to a decedent's property passes on the decedent's death to the person to whom it is devised in the decedent's last will, or, in the absence of such a devise, to the decedent's heirs[.]" California Probate Code Section 7001 provides that a decedent's property is subject to administration under the California Probate Code and is subject to "the rights of beneficiaries, creditors, and other persons as provided by law."
At a testator's death, title to his real property vests instantly in the person to whom it is devised. See Pasadena Investment Company v. Weaver, 376 F.2d 175, 178 (9th Cir.1967). In addition, real property is conveyable during probate, but the conveyance is subject to the outcome of the probate proceedings. See Hair v. Pangelinan, 816 F.2d 1341, 1343-44 (9th Cir. 1987) (noting that assignments or conveyances made during probate are "subject to the perils of the proceeding.").
Thus, California law provides that a decedent's property passes at once to those entitled to it, whether under a will or by intestate succession, subject only to a temporary right of possession in the executor or administrator, under the supervision and control of the probate court, for purposes of administration of the estate. Administration of the estate includes payment of debts, funeral expenses, attorney's fees, and a family allowance, etc., which might result in the sale or disposition of any given asset in the estate. An heir may assign or otherwise alienate his interest in the estate, although transfer of possession of that interest usually must await final closing of any probate action covering the estate. See United State Fidelity and Guaranty Co. v. Mathews, 207 Cal. 556, 279 P. 655 (1929); In re Michel's Estate, 18 Cal.App.2d 201, 63 P.2d 333 (1936). The rule is the same for real or personal property. See Ludwicki v. Guerin, 57 Cal.2d 127, 367 P.2d 415, 17 Cal.Rptr. 823 (1961). Therefore, the recipient's inheritance qualified as income for SSI purposes in April 2002, and as a resource thereafter, because he had the legal right to dispose of his interest in the California property upon his mother's death.
However, as noted in Perera v. Schweiker, 560 F. Supp. 385, 388, (W.D. Cal. 1983), the language in the SSI resource definition, 20 C.F.R. § 416.1201(a), indicates that the resources must be currently available. Thus, it is arguable that during probate individuals cannot readily obtain and liquidate estate property because it is subject to sale in order to pay creditors.
Applying a rule that inherited property qualifies as income as of the date of the testator's death may be difficult, however. The regulations require that resources be evaluated according to their "equity value," which is defined as "the price that item can reasonably be expected to sell for on the open market in the particular geographic area involved; minus . . . any encumbrances." 20 C.F.R. § 416.1201(c). The fair market value of a share of an estate can be set once the distribution decree issues, but problems will arise in valuing the undetermined share for the time period between the decedent's death and the issuance of the decree of distribution. One would have to consider such factors as: the chance of finding more than one will; will contests; claims of pretermitted heirs; the extent to which creditors' claims will diminish the value of the estate; ascertaining the value of all assets (including "unique" items) in the estate; etc. Because of the difficulty in determining the amount of income that the recipient will actually receive until after the estate's creditors and others expenses are satisfied, it may be preferable to defer determination of the amount of income and resources until either the recipient actually receives the inheritance or until the close of probate proceedings, whichever occurs first.
It should be noted that two Office of General Counsel (OGC) opinions state that income should be imputed to the recipient immediately upon the testator's death, regardless of ongoing probate proceedings. See OGC Memorandum re Wesley A~, ARC (S~) to RC (M~) (Feb. 27, 1989), citing Carlson v. Lindauer, 119 Cal.App.2d 192, 308, 259 P.2d 925, 933-34 (1953) (heir was free to sell or assign her interest at any time, even though the property itself (formerly real estate, currently the proceeds from the forced sale of that real estate) could not actually be conveyed prior to the final distribution of the estate); see also OGC Memorandum re Agnes I~, ARC (S~) to RC (M~) (June 29, 1989). These Region IX opinions regarding California law conclude that since it is within an heir's power to liquidate his inheritance rights, "this valuable interest must be counted as a resource." See also Memorandum re Ownership Interest in Probated Estates-Ethel M~, Region VII, ARC (U~) to ARC (S~) (May 5, 1988). However, as discussed below, other OGC opinions from Regions IX, VIII, and V conclude that it is more appropriate to defer determining the amount of income and resources until the earlier of either the recipient's receipt of the inheritance or until the close of probate proceedings.
Here, the recipient's right to sell or to receive the income from the Bakersfield property vested immediately upon his mother's death, in April 2002. However, that right, and the value of this unearned income, was subject to rights of creditors and to administration of the estate. The only conclusive evidence that the recipient received income and of the amount of that income, would be a probate distribution decree, or other court documents, or a statement from the recipient that the property, or proceeds from its sale, had been conveyed to him. In other words, until probate closed and the proceeds of the estate were actually distributed, it was uncertain whether the recipient would, in fact, receive his share of the property or whether the proceeds from selling the property would cover the debts of the estate. Because of this uncertainty, a bank or other lender would be unlikely to accept the recipient's right to receive the property as collateral for a loan in the amount of the fair market value of the property.
Therefore, because of the difficulty in determining the value of the property while the assets are still subject to diminution during probate proceedings, we believe that the best course is assume, based on POMS SI 00830.550B, that an individual derives no income until the earliest of either the date the individual alleges, via signed statement or other documents, receipt of the inheritance or the date that the estate is closed. See Memorandum, Treatment of Inheritance Monies in the State of Montana, ACC (S~) to RC, SSA (June 28, 1994); see also Proposed Policy Interpretation Ruling-Title XVI: When Inherited Property Becomes a Resource, CC (C~) to ARC-POS (Lewis) (Sept. 26, 1995).
In some cases, an estate will have little or no debt, so that an individual's ownership interest is fairly easy to determine at the date of death. However, in other cases, the estate may be heavily indebted or may have an unknown amount of debt, such that an individual's interest is so speculative as to render it without any fair market value. See OGC Opinion re Carmella R~, ARA (T~) to ARC-POS (P~) (Aug. 16, 1982). In that Region IX opinion construing California law, the author suggested that, because of the difficulty in determining the equity value of an estate during probate proceedings, it may be preferable to defer making the value determination until probate closes.
In this case, the recipient alleges that he did not receive the $23,793.22 from the sale of the inherited property until May 2003, when escrow closed. Applying the assumption in SI 00830.215B, the inheritance of $23,793.22 should have counted as income in May 2003 and as a resource in June 2003, unless the estate closed earlier, which can be determined from the probate attorneys involved, the representative, or court records.