Estate Planning

Gift Taxes

It may seem easy to avoid estate tax. Why not simply give away everything you own right before you die (or give it to your spouse and have him or her give it away before he or she dies)? Well, the government is one step ahead of you. There are also taxes to pay when making lifetime gifts. In fact, these taxes are part of the same tax, called the Transfer Tax. In essence, the government will try to tax you every time you transfer an asset to someone, no matter whether you are alive or dead at the time.

The gift tax is a tax on the fair market value of assets transferred as gifts whether the gift is direct or indirect, and whether the gift is in trust or otherwise. Payments for support (paying for food, clothing, shelter, court-ordered child support payments, etc.) for your minor children for which you are legally obligated, are not considered gifts. For lifetime transfers; i.e., gifts, there is an applicable credit amount which allows you to transfer a certain amount of assets during your lifetime free of gift tax. The amount of assets you can transfer is known as the applicable gift tax exclusion amount and is fixed under current law at $1,000,000. There are also gift tax exclusions that we will discuss later. The gift tax rates are the same as the estate tax rates.

CAUTION: The IRS uses a very broad definition of a gift for tax purposes. If you sell an asset to someone below fair market value, forgive a loan, fail to charge interest on a loan or give someone an interest in an asset you own, you have made a gift if you did so for a non-business reason. Before making a transfer of this nature, call your professional advisor.

You first use your applicable credit to offset tax on taxable gifts. However, certain taxable gifts are added back to your taxable estate and thus impact the estate calculation. Consult with a professional advisor regarding the impact on your estate tax if you have made taxable gifts during your lifetime.

Gift Tax Exclusions

There are four very important exclusions to the gift tax that allow you to make tax-free lifetime transfers without ever using your gift tax applicable credit amount. By doing so, your estate is reduced when you die, and your family ends up with cumulatively more assets. Whenever you save estate taxes, you are giving more to your family or to other parties and less to the government.

Gifts To Charities

You are generally allowed to give an unlimited amount to qualified charities and not incur any gift tax or estate tax on those transfers.

Gifts To A Spouse

You can give an unlimited amount of gifts each year to your spouse free of gift tax. Special limits apply if your spouse is not a U.S. citizen.

CAUTION: If you plan to give your spouse a gift using a trust, or if his or her right to use the gifted property will terminate upon a specific event or at a specific time, you may not get an exemption from gift tax. Speak to your attorney or other estate planning professional about this before you actually transfer the property into the trust.

Gifts For Medical Or Educational Expenses

You can give an unlimited amount to pay someone’s medical or educational expenses. These transfers must be made directly to the institution and not to the beneficiary. In the case of educational expenses, only payments for tuition are covered for this exemption (payment for books or room and board is not covered). Medical expenses that are reimbursed by insurance are not eligible for this exemption.

Annual Exclusion Gifts

Every person is allowed to give any individual up to $12,000 a year in gifts (indexed for inflation in $1,000 increments). This is called your Annual Exclusion. You can give $12,000 to one hundred different people each year and have all the gifts covered under this exclusion. You are not allowed to carry over an annual exclusion from one year to the next. Example - You cannot give your sister $24,000 this year and claim a full annual exclusion because you did not give her anything last year.

CAUTION: Gifts that qualify for the annual exclusion must be "present interest" gifts versus gifts of "future interest." This means the recipient must be able to use the assets immediately, versus restricting their "present use", for example, by putting the assets in a trust for future transfer. However, there are methods of qualifying gifts in trust for the annual exclusion, e.g. a Section 2503 (b) trust established for a minor. Ask your estate planning professional for a more detailed explanation of these methods.

Gift Splitting

If you are married (and neither of you are nonresident aliens), you can file an election on your gift tax return that allows both you and your spouse to treat gifts made by one spouse as having been made equally by each of you. This is called gift splitting. If you gave your brother $24,000, and your wife didn’t give him anything, you can elect gift splitting and the entire gift is covered by the annual exclusion ($12,000 from you and $12,000 from your spouse).

Gifts And Taxes

You gave your sister $24,000 - You can gift split with your spouse and you would be viewed as each giving $12,000.

Your spouse paid $13,000 directly to a hospital for her brother’s heart surgery

When Do You Have To File Gift Tax Returns?

Gift tax returns are filed on Form 709 (or 709A - Short Form) and are due by April 15 following the year you made the gift. In general, you need to file a gift tax return when you:

Make any gift (including to charity) that exceeds $12,000 (other than to your spouse) or any gift that is not a present interest gift.

• Elect to gift split with your spouse. (Your spouse may not need to file a separate form if he or she did not make any gifts on his or her own.)

PLANNING POINTS:

• You can get an extension to file your return by filing a request for extension with the IRS; however, you must pay any tax due by April 15.
• Always keep copies of your gift tax returns.

If you want to elect gift splitting, file your returns before the IRS audits you, or you do not get the right to claim this benefit.

State Death Taxes And Gift Tax

The state you live in may levy a separate estate tax or inheritance tax and may also charge a state gift tax. Until 2009, you may claim a deduction for the state death tax. There is no federal estate tax in 2010 against which to claim the deduction. Starting in 2011, you can claim a credit for the state estate or inheritance tax. (Prior to 2005, one claimed a similar credit.) Because of all these law changes, in the coming years there will most likely be a lot of changes in the way states impose their estate taxes. Depending on the laws in each state, this change could cause some estates to pay more in transfer taxes. This section covers federal taxes only, so check with your attorney or other estate planning professional about state tax issues when you have your estate plan done.