Gifting Strategies and the Fiscal Cliff
As American taxpayers wait for the champagne bottles to pop and the first refrain of Auld Lang Syne for the 2013 New Year, we are no closer to knowing whether we can gift only up to $1 million without being subject to gift tax or up to $5.12 million or some other amount yet to be determined. This is because EGTRRA, the Economic Growth and Tax Relief Reconciliation Act, part of what is referred to collectively as the Bush tax cuts, is scheduled once again to expire at midnight on the cusp of December 31-January 1. This confusion is only part of what is described as the “fiscal cliff.” Frankly, for most, the distinction relating to gift tax will not make a difference. Rare are the circumstances when even wealthy individuals decide to part with $1 million or more and it is only above the threshold amounts when gift taxes may need to be paid and then only on the amount above the threshold. Capital gains taxes are often a more relevant discussion.
However, there are some for whom the distinction on gift tax matters and it has to be remembered that the federal gift tax is one side of the unified Federal Estate and Gift Tax. Gifting for wealthy individuals is part of an overall estate tax strategy. Lifetime gifts above the annual exclusion ($14,000 per person in 2013) may decrease the unified credit for the federal estate tax. In other words, when looked at in conjunction with taxes that could be due on the estate at death, gifting during lifetime can make a difference. Gifts above the annual exclusion need to be reported (but not necessarily paid) on a gift tax return on the same day in the year following the gift when federal income taxes are due (usually April 15). When to gift, why, and to whom become consuming questions.
In an article dated November, 2012 by R. Moshman, Esq., The Estate Analyst, and reported in lawprofessors.typepad.com/trusts_estates_prof, “Winning (and Losing) Gifting Strategies: Can you have your cake and eat it too?” the author raises the question whether wealthy individuals could take advantage of the unusually large gifting exemption for purposes of their own. Here are some of the considerations he suggested.
“…1. Type of Assets: As an example, an individual or couple with a net worth of $15 million probably owns several real estate properties, stocks, retirement plans, insurance, and perhaps a share of a business. Some of the assets may be in current use, others may have already appreciated in value, and others may be generating income. There are consequences for every asset that is involved in a gift.
2. Liquidity: Even if the analysis of a particular estate demonstrates a potential tax savings by making current gifts, it is rare that someone has $5.12 million in liquid assets that is ready to be transferred conveniently…
3. Capital Gains: Question – Is a donor better off holding onto an appreciated asset so that it can go through his or her estate at death and then be transferred with a stepped up basis that will avoid capital gains?…
4. Existing Plans and Estate Size…” The author suggests an unmarried donor in his 80’s with a net worth of $20 million might more reasonably make a large gift as opposed to a married couple in their 50’s with $10 million who need to stretch assets for the rest of their lives. However, I would note that large gifts by a person late in life might be challenged as having resulted from undue influence or possible fraud.
“ … 5. Know Your Donee…” Finally, transfer to a donee in debt, is getting divorced, wastes, or needs to pay taxes himself may not make sense.
Moshman notes that gifting to avoid known creditors of the giver could be challenged as a fraudulent conveyance with civil and criminal penalties. Transfers for Medicaid purposes may result in penalty periods during which the government would not pay. Readers of my columns will realize that this issue is even more complicated than this. Medicaid gifting rules are completely different from gifting rules for gift and estate tax purposes and do not allow $14,000 (or $13,000 or $10,000) annual gifts.
The two areas where the author spoke most favorably regarding gifting are transfer of a business or an income-producing property under rules for a family limited partnership, an LLC or Sub-Chapter S corporation and GRATs (Grantor Retained Annuity Trusts). These require expert advice.
For more, listen to “50+ Planning Ahead” a weekly radio program on WCHE 1520 on every Wednesday from 4:30 pm to 5:00 pm with Janet Colliton, Colliton Law Assocs., PC, and Phil McFadden of Home Instead Senior Care.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.