You don't say what jurisdiction you are in, but at least in any common law jurisdiction in the United States, it would presumably be possible to implement the mother's wishes through any of a number of legal devices. There are a lot of possible options depending on what exactly the mother wants to do and what rights she wants the friend to have relative to the property. (For example, does she want the friend to be able to rent out the property for income? Who will be responsible for maintenance of the property after the mother's death -- the friend or the sister? etc.)
I cannot give any advice on what the mother should do, especially since the details vary by jurisdiction and the exact documents required also vary. This should likely be handled as part of the mother's overall estate plan, with the assistance of a competent lawyer licensed to practice in your jurisdiction. If the mother does not already have an estate planning attorney, she should retain one and discuss these matters with said attorney. The attorney will ask the questions necessary to determine the mother's precise wishes and the attorney will draft the papers accordingly. It may be that the mother has not really even clearly thought about what exact rights she wants the friend to have, and the lawyer will help her make those decisions.
For the vast majority of people, estate planning is not something they should attempt to do themselves without legal counsel.
The tax implications will depend on what exactly the mother and her attorney decide to set up. For that reason, I cannot comment on the mother's specific situation, but I can post some general remarks which may be of interest, and may convince you to seek counsel.
Generally speaking, the US gift tax applies to "the transfer of property by gift". 26 USC § 2501(a)(1). A tenancy-at-will, a tenancy for years, and a life tenancy (otherwise known as a life estate) are all forms of property and the gifting of them is potentially subject to gift tax. E.g.,
Dickman v. Commissioner,
465 US 330, 336-37 (1984) (stating that a tenancy is a form of property, the granting of which potentially subjects the grantor to gift tax).
The value of a tenancy-at-will (like all property) is determined by "the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts". 26 CFR 25.2512-1. The granting of a tenancy-at-will presumably amounts to an annual gift during the life of a grantor equal to the fair rental value of the property each year, with some discount for the uncertain duration of the tenancy-at-will. E.g.,
Rutland v. Commissioner, TC Memo 1977-8,
36 TCM (CCH) 40, 53 (determining annual value of tenancy-at-will based on fair rental value);
Dickman, 465 US at 337 (noting that the "uncertain tenure [of a tenancy-at-will] may reduce its value").
On the other hand, a mere
licence to live at the property (as distinguished from a tenancy) is generally not considered to be a property interest. E.g.,
Viscarello v. Elliott,
No 801 MDA 2014, 2015 PA Super Unpub LEXIS 4355 at *13 (Nov 25, 2015) ("A license is not a property interest[.]"). The definition of what constitutes a licence rather than a tenancy is determined by state law. Since a licence is not property, the granting of one is presumably not subject to gift tax, although I can't locate an authority that explicitly says that. It is a safe bet, however, that the courts will look at the substance of the arrangement, rather than merely whether it is denominated as a "licence". E.g.,
Jewish Theatre v. Roundabout Theatre Co,
203 AD2d 155, 156 (NY App Div 1994) ("What defines the proprietary relationship between the parties is not its characterization or the technical language used in the instrument, but rather the manifest intention of the parties[.]") (citation omitted).
The gift tax has generous annual and lifetime exclusions. The annual exclusion applies on a per-donee basis. 26 USC § 2503(b)(1). The annual exclusion for 2015 and 2016 is $14,000
according to the IRS website. For the purpose of applying the annual exclusion, the value of a tenancy-at-will cannot be discounted based on its uncertain duration. 26 USC § 2503(b)(1) ("Where there has been a transfer to any person of a present interest in property, the possibility that such interest may be diminished by the exercise of a power shall be disregarded in applying this subsection, if no part of such interest will at any time pass to any other person."). Hence, for the purpose of applying the exclusion, the taxpayer can only consider the fair market rental value.
I urge you to advise the mother to retain counsel for her estate planning needs. This post does not attempt to analyse the mother's situation or her wishes in any way, and this post is absolutely not a substitute for the advice of counsel on your specific situation. The laws are different in every jurisdiction, even for the purposes of federal gift tax because of how it depends on state property law. You certainly cannot rely on the general information in this post for any purpose other than perhaps providing background information that you can talk about with the attorney that you retain for estate planning and other purposes.
If you reply, please do not quote this entire post.
