Gift Tax Exemption Amount Gets Even Better Through 2012

I have been posting quite a bit this past year on gifting and the fact that transfer taxes are on sale for a limited time only - it's like a 2 year long Black Friday or Cyber Monday for families with taxable estates.  The sale gets even better in 2012 - the IRS just announced that the federal Gift Tax Exemption Amount is being increased to $5,120,000, from $5 million, due to adjustments for inflation.

First, and as an aside, I think that adjusting the estate, gift, and GST exemptions for inflation each year is eminently logical.  Of course, these logical increases have been created in a temporary tax law, so don't go thinking that Congress was so genius in putting all this together.

Second, the Estate Tax Exemption Amount and GST Exemption Amount are increasing as well. But since you have to die to take advantage of the Estate Tax Exemption Amount, that is not quite as headline worthy.

What does the increased Gift Tax Exemption Amount mean?  Well, for wealthy families, particularly those where they own closely held businesses or real estate, or other appreciating assets, there is a window of time through 2012 where large gifts can be made without paying gift tax.  This means that all the lovely appreciation on the asset following the gift will flow transfer tax free to the children.  Due to the Gift Tax Exemption increase, in 2012 you can give $120,000 more than in 2011.

I was just interviewed on this subject by NJBiz.  The theme - there may be a limited window of opportunity to take advantage of these tax laws. Analyzing the pro's and con's is time consuming and complex so families that think this might be good fit for their wealth planning goals should start examining their options now.


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A Crummey Trust is a Good Thing

Clydesdale HorsesUsually "crummy" and "tax law" make you think of people in orange jumpsuits in white collar penitentiaries.  But not so with the so-called "Crummey" trust, a work-horse in the estate planning stable.

The Wall Street Journal just ran a piece on Crummey Trusts, saying "There's nothing crummy about a Crummey trust—even in a period of higher exemptions for estate and gift taxes."   If you have an insurance trust or even a trust for your kids, you probably have a "Crummey Trust" and its working just fine.

"Here is how a family can use a Crummey trust: Have your estate planner set up one to buy a life-insurance policy, and fund the premiums with annual gifts. (Each year, a person can give unlimited separate gifts of up to $13,000—the current annual ceiling for gifts to individuals.) That gets money out of the estate while skirting the gift tax. Since the trust owns the policy, the death benefit ultimately goes to the trust, shielding it from federal estate taxes.

Crummey trusts are used in many circumstances, but are best suited for making gifts to minors—especially when a parent is giving money to a young child who isn't ready to handle a large sum. Grandparents, on the other hand, often are giving money to grown children, or have already helped fund a college-savings 529 plan."

Why "Crummey" by the way?  It was the name of the taxpayer who won the case allowing gifts to trusts to qualify for the $13,000 (currently)  so long as notice of withdrawal was given to the beneficiaries.

But like all good things, there is a catch.  To get the benefits, there is an annual paperwork requirement.

"The trustee must send out "Crummey letters" each year, informing beneficiaries that they can withdraw the gifted amount during a window of time, say 30 days. Usually, the beneficiary leaves the money in the trust. But the IRS considers it a tax-free gift only if the person has the right to take it in the short term, and the Crummey letter proves that he has that right."

This leads to many issues, including:

  • What if the Trustee forgets to send the notices?  Then you have made taxable gifts each year.
  • What if a beneficiary is a spendthrift and you don't want to give them a right of withdrawal?

The key - explain your family situation clearly to your estate planning attorney so he or she can see if "Crummey" is a good fit for you.

Thanks to @raniacombs for tweeting this to @VeteranAid who brought this to my attention!


Gifts of Real Estate really are Gifts - and the IRS is looking for them

House Gift TaxesTypical scenario – Client’s child comes in and advises “Oh – and I own (all or part of) my parents’ house.” For some reason the fact that they own another parcel of real estate is normally an afterthought. This leads to more questions, such as “How did you get the real estate?”, and “Why?”. Some reasons might include:

  • Mom was afraid of losing the house if she got sick
  • Dad was going through a divorce
  • Mom and Dad didn’t want me to pay taxes

All of these situations might be great reasons to consider transferring a house, but there are many implications to a transfer of real estate, one of them being gift taxes. The next question we ask might be “Did your parents file a gift tax return?”. And the common answer … a blank look.

A Gift Tax Return (Form 709) is required to be filed in any year where gratuitous transfers to any given person exceed the Annual Gift Tax Exclusion Amount (presently $13,000 per person). If Mom gives you a house, she is likely to have given you more than $13,000. The Gift Tax Return (Form 709) must be filed even if no actually tax (i.e.: writing a check to the IRS) is due. So, if Mom gave you a house worth $313,000, she needed to file a Gift Tax Return (Form 709) to reflect the $300,000 gift in excess of her Annual Gift Tax Exclusion Amount, even if the Lifetime Gift Tax Exclusion Amount is large enough to shelter the gift from taxes.

What is the Lifetime Gift Tax Exclusion Amount? That is the amount over and above the Annual Gift Tax Exclusion Amount (presently $13,000 per person) you can give away during your lifetime without writing a check to the IRS. The Lifetime Gift Tax Exclusion Amount was $1,000,000 from 2001 to 2010, is $5,000,000 for 2011-2012, and is scheduled to return to $1,000,000 (adjusted for inflation) in 2013.

“So what?” a person might say. “If I don’t have to write a check for taxes, who cares if I file a tax return?” Well, the IRS cares, and Robert W. Wood reports that the IRS is actively mining deed transfers to find property transfers where no gift tax return was filed.

Why does the IRS care, if no tax may be due? Well, it has to do with how the Federal Estate Tax is computed. When you die, the amount of prior gifts (in excess of the Annual Gift Tax Exclusion Amount (presently $13,000 per person)) is added back into your gross taxable estate to determine the value of your estate for tax purposes. Failure to report a taxable gift during your lifetime can allow your estate to understate the value of your taxable estate upon your death. As a result, the IRS collects less than it’s due – and the Executor may be personally responsible for the tax underpayment.

And why is the IRS looking at deeds now? Robert Wood reports that “After all, with the year-end estate tax compromise, estate and gift tax planning in 2011 and 2012 is going great guns. Many families are giving big.”

So file those gifts tax returns. It’s really not worth it not to. Penalties and interest and personal liability for your poor executor who knew nothing – not a good place to be.

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