Gift Tax


 

 Our government is spreading the love this season in the form of a long awaited new tax law which extends the current favorable income tax provisions.  The tax law also provides new economic stimulus in the form of payroll tax reductions for 2011 and an extension of unemployment benefits.  And just when you thought it couldn’t get any better?  How about a $5,000,000 estate tax exemption!

 Many of you know that the previous law was set to re-introduce the estate tax in 2011 with a $1,000,000 exemption.  Most tax professionals assumed that the law would  be amended either this year or early next year to continue the $3,500,000 exemption which was available in 2009.  But this $5,000,000 exemption caught us all off guard.  In fact there are numerous other provisions in the tax law that we have not yet had a chance to digest, but I wanted to pass along a few quick details that have not made it into the mainstream press coverage.

 The tax law does have provisions which would apply retroactively for 2010 for decedents who have already died, but these provisions are optional.  Estates for 2010 can elect to keep the old rules or take the new rules if they work out better.  Don’t worry, the law provides for extensions on estate tax related deadlines to allow everyone time to figure out the right course of action.

 The $5,000,000 exemption is now “portable” between husband and wife.   They each have an exemption and if they don’t use all of the exemption at death then the unused portion can be transferred to the surviving spouse.  This will simplify tax planning considerably and allow for shorter and less complicated documents going forward.

 The $5,000,000 exemption is not only for transfers at death but also for gift transfers.  This is an important change that will open up new planning opportunities for some high net worth clients.  The previous law only afforded a $1,000,000 exemption for gifts.  However before making decisions concerning large gifts, clients must also consider the impact of tax basis.  In some cases a large gift can be a bad tax decision; see my blog entry from April 20, 2010.

 This new tax law is in place for only 2 years, with the expectation that it will be extended or further modified in the interim.  It is not clear yet how the estate tax provisions in the law will fare, but it appears that we could be faced with this same estate tax showdown   (a return to a $1,000,000 exemption) in 2 years….right in the middle of another election.

 That is the early report.  I’m off to spend time with family and I hope you are as well.  This year we’ll gather around the fire and reminisce and teach the children about the good old days……when deficits were small and we even had a balanced budget in some years…and of course we never had such things as 0% credit cards…..back then we had to save money if we wanted to buy something….and I remember when……

 Merry Christmas and Happy New Year to you all! 

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How to carry out the decedent’s wish — 101.   I bet many of you have heard some variation of the following .

Aunt Lucy had no kids of her own but she had a bunch of nieces and nephews – seven of them in fact.  She loved them all but she was particularly close to her niece Mary who  helped out quite a bit during Aunt Lucy’s final years.  Aunt Lucy regularly talked about how she wanted Mary to inherit the old family farm.  When the time came, the family discovered that Aunt Lucy’s Will left all of her property and assets equally to her nieces and nephews and didn’t make any special provisions for Mary alone. Unfortunately Aunt Lucy’s statements didn’t change the Will.  This meant that after Aunt Lucy’s death the family farm was owned by all the nieces and nephews together.

So is there any way to fix this?  How can you carry out Aunt Lucy’s wishes when she failed to make the necessary provisions in her Will?  Some of you may wonder if a court proceeding would do the trick, but our courts are not in the business of changing provisions in a Will.  A court proceeding is appropriate if there is some ambiguity or conflict in the terms of the Will itself or if there is a question of the Will’s validity.  None of these applies for Aunt Lucy’s Will.

However there is a solution which is pretty simple, provided we have the agreement and cooperation of all the nieces and nephews.  As legal owners of the property, the nieces and nephews can execute a quitclaim deed in favor of Mary to transfer title to the property entirely to her.  This transaction does not require any court approval or any court procedure, other than recording the deed.   This is simply an independent action of the beneficiaries to fulfill the wishes of the Aunt Lucy notwithstanding the terms of the Will.

One caveat in this solution is that the valuation of the property is very important.  The transfer in this case is a gift from all the other nieces and nephews to Mary.  Under the tax law, each niece and each nephew can give Mary up to $13,000 worth of property in any given year; this is known as the annual gift tax exclusion.  As long as the value of the property divided among all of the nieces and nephews is below the $13,000 annual exclusion, there is no gift tax concern.  However, if the gift for each donor will exceed the annual exclusion, then you can always spread the gift out over several years with multiple deeds or you may also determine that a larger gift will not create tax issues for the donors.

OK that all works fine if everyone agrees, but what if you have that one nephew who doesn’t get along with Mary and won’t cooperate in the deed.  In this case you may be out of luck unless Mary and/or the other beneficiaries are willing to work out some type of “settlement” with the nephew.   Again the key is reaching some agreement between the beneficiaries.  As long as the beneficiaries can all agree and as long as the gift tax consequences can be addressed, then we really can fulfill Aunt Lucy’s wishes.  Of course all of this trouble can be avoided if we can just get people to update their Wills to reflect their wishes – get off the sofa Aunt Lucy!

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