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Gift Tax Basics are Important to Many

Gift Tax Basics are Important to Many

By: Martin M. Shenkman, CPA, MBA, JD

Introduction/Overview: When most people here about the $5 million gift exemption, they assume that the gift and estate tax won't ever effect them. Is that a safe bet? No. The gift and estate tax exclusion may drop to $1 million in 2013, so everyone should still plan gifts now to minimize the possible future tax impact until the law becomes clear.

√ Question: Sounds simple, a "gift" is a "gift"?

√ Answer: Nothing in the Alice in Wonderland world of the tax law is simple. The IRS views lots of things as "gifts" that mere mortals might not.

The gift tax is a tax charged on the right to give away assets, gratuitously, during your lifetime.

Common usage of the term "gift" implies a donative intent, tax law does not require that you had any particular intent....so you may make a gift not even really being aware you were giving something away under the tax laws.

All that the tax laws require to trigger the gift tax is a transfer of assets for less than full payment of value (consideration).

√ Question: Well, it's at least simple to know who made the gift and has to report it. Right?

√ Answer: Sorry, nothing is ever simple when it comes to taxes.

If you make a gift to your child or grandchild, that part is simple. You're the individual who makes the gift, you report it. But it can get much more complicated.

For instance, if it was the beneficiary of a trust or estate, or the partner or shareholder of a partnership or corporation, that made a donation.

So, technically, if your grandchildren come to visit at the office and take home your waiting room furniture for their backyard fort, your corporation has made a gift, but that gift is attributed to you.

Question: What if I give a grandchild a bond, or an interest in a family partnership, but I want to keep the income for now?

√ Answer: That is a very common problem and raises a thorny issue that catches lots of taxpayers. That gift may not be in tax jargon "complete." A transfer is not taxable (reportable) as a gift until complete.

Donor must transfer beneficial interest in the assets to the recipient (donee) - what does this require? In English, the child or grandchild donee must really own the asset.

The Donor must really give up control over the asset. If you gift family partnership (FLP) interest, but borrow money back on a regular basis, or extract most of the earnings as compensation without regard to the fair value of any work effort, has control been given up? Probably not. The IRS will likely assert that all those purported gifts are back in your estate.

√ Question: Can your agent make gifts under your power of attorney?

√ Answer: Maybe. The power has to expressly permit gifts or the IRS may try to unwind those as well. For readers in New York, this requires that a special "Major Gifts Rider" be signed, in addition to the regular power of attorney.

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