Encyclopaedia - Finance

Many readers of this column take me up on my offer for free financial advice. ‘Mr. K’ from Michigan, like many, wondered about taxes owed on his mother’s house. Chances are you will deal w

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

ith the same issues.

He writes, “I have a question about my mom's home that I inherited. Before my mom died she put her real estate into joint ownership between her and my sister. It was

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

supposed to help make settling her estate easier. Before mom passed away, my sister died. After my sister died, mom placed the real estate jointly between herself and me. Mom passed away o

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

er a year ago and I am now contemplating the sale of her house. After mom's death I had the home transferred to my and my wife’s names.

What are my capital gains liabilities on the sale o

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

f the house? Do I pay capital gains on the whole sale, half the sale, or none of the sale?”

Mr. K’s question provides an excellent opportunity to clarify the confusing matter of gifting a

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

nd inheritance. Few people are aware of the tax implications and needlessly end up creating a tax headache for themselves and their loved ones.

Let’s explain what an inheritance is and ho

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

it differs from a gift. An inheritance is money, property, or another asset of value that is transferred after death. A gift occurs when money, property or other assets are transferred be

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

fore death. An inheritance and a gift are handled very differently from a tax standpoint.

Each of us can give gifts up to $12,000 per year to any person we want without any Federal tax im

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

plications. (There may be some state gift tax implications so check with an accountant.)

Inheritances aren’t subject to Federal Estate Tax unless the estate’s value is over a certain amou

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

t, which as of January 1st, 2006 is two million dollars. Because all assets owned by the deceased are included in the estate’s valuation (i.e. retirement accounts, annuities, life insuranc

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

e, etc.), reaching that two million dollar limit is easier than you think.

Even if there is no gift or estate tax when the assets are transferred, there can be capital gain taxes when the

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

assets are sold. The trick is determining the asset’s original value, or cost basis, and that depends on whether the asset was a gift or an inheritance.

When you receive a gift, you also

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

receive the cost basis the person giving the gift had. So, if a parent paid $10,000 for a home and it was worth $100,000 when it was gifted to the child, the child now has a cost basis of

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

$10,000. If the house is sold 5 years later for $125,000, the child will owe taxes on a gain of $115,000.

If the house was instead inherited by the child, the cost basis is the value of

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

the house at the time of inheritance, which in our example would be $100,000.

So when the house is sold 5 years later for $125,000, the child only owes taxes on the gain of $25,000. In ta

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

parlance, the house received a step-up in basis when transferred after death. It doesn’t if transferred prior to death.

Let’s apply this to Mr. K’s situation. When Mom added Sister’s nam

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

e to the deed, it was a gift to the sister of 50% of the value of the home and sister’s cost basis was 50% of Mom’s cost basis.

When sister died and the house transferred back to Mom, it

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

was considered an inheritance. So Mom’s cost basis on the 50% she inherited was the market value at the time she inherited it back. So 50% of Mom’s ownership is based on her original cost

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

asis and the cost basis of the other 50% is the value at Sister’s death.

When Mom then adds Mr. K’s name to the property, it’s another gift. So Mr.K will inherit 50% of Mom’s new, adjuste

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

d cost basis. When Mom dies and the other 50% is transferred to Mr. K, his cost basis in that 50% is the value at the time of Mom’s death.

Now you know why accountants make all that money

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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