As we near the end of the third quarter of 2014 I ask myself, where has the year gone?  It seems it was just yesterday that I was indolently celebrating the New Year.  Now, I have come to realize that we are coming into the last few months of 2014, and with that, the holiday season is impending. Fearing that I may be perceived as one of those people who begins their Christmas countdown months too early, I am reluctant to say that Christmas is in fact around the corner, and the time to begin shopping for gifts is uncomfortably near.  In the spirit of this gift-giving discussion, I wish to remind those of you who are benevolently inclined or who are looking to transfer assets free of gift tax that in addition to budgeting for the latest and greatest toys and gadgets for your young children and grandchildren (toys and gadgets that we only dreamed of as kids), you must also budget for your annual exclusion gifts.

Internal Revenue Code section 2503(b) provides in relevant part:

• In general.-- In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year, the first $10,000 of such gifts to such person shall not, for purposes of subsection (a) [defining the term “taxable gifts”], be included in the total amount of gifts made during such year. (Emphasis in original.)

In 2014, the $10,000 figure above, which is indexed for inflation, increased to $14,000.  Thus, in 2014 taxpayers can gift up to $14,000 per donee, and married couples can gift twice this amount, or $28,000.  This can be a useful tool to transfer value out of ones estate free of gift taxes.  And, if a taxpayer has many donees to which he or she is prone to make gifts, the annual exclusion can be especially effective.  So again, for those of you who are altruistically disposed, before you get caught up in the holiday cheer and before the year-end comes and goes, be sure to budget you annual exclusion gifts.

In January and February of this year we blogged about the changes to the estate tax.   We may have even used the term ”permanent” in our January post.  Please forgive us.  While it’s true that the estate tax laws that were passed on January 1, 2013, do not contain an expiration date or sunset provision, the changes in the law are permanent  only as long as Congress and the President leave the law unchanged.

Last week the Obama administration unveiled its budget proposal, and once again the estate tax is in the crosshairs of uncertainty.   President Obama’s proposed budget would decrease the estate tax exemption to $3.5 million starting in 2018 and would be indexed for inflation moving forward.  Furthermore, the estate tax would be increased from today’s 40% rate to 45%.

In addition to the foregoing, there are  other interesting proposals in the budget that would impact some of our estate planning techniques.  Accordingly,  we will be closely watching the proposed budget to see if any of  the changes make their way into a legislative bill this coming year.

As a result of last year’s rush to make substantial gifts before the gift and estate tax laws were set to change (which didn’t end up happening) our office is now faced with helping these same clients prepare and file their gift tax returns (Form 709).  Some clients prefer to defer to their CPA for preparation of the return, while some clients and their CPA’s choose instead to have our office prepare the return.  Since all of our firm’s estate planning attorneys have either a CPA designation, a master’s degree in tax, or a master of laws in tax (LLM) or some combination of these three, we are well-qualified to assist with the preparation of a gift tax return.

Gift tax returns must be filed on or before April 15 unless an individual extends his individual return which will cause an automatic extension of the filing date for the gif tax return.  Of course, any actual gift tax due must be paid on or before April 15, regardless of extension.  It is possible for a person to file his or her individual return on or before April 15 and extend their gift tax return by filing form 8892.  The extension due date is October 15.

But who must file a gift tax return?  For 2012, any gift in excess of $13,000 should be reported to the IRS on Form 709.  For most people there will be no actual tax due since the lifetime gift tax exemption amount will “cover” any tax on gifts that do not exceed $5,120,000.  For 2013 the numbers above change slightly to $14,000 and $5,250,000, respectively.

For most of the gifts that our office helped our clients achieve, we purposely applied “discounts” to the value of the gift.  These discounts include discounts for lack of control and discounts for lack of marketability.  There are other discounts that are statutory, such as the discounted gift value under a qualified personal residence trust (QPRT).  But in either case, the gift tax return must be prepared and enough information disclosed to the IRS so that the IRS can easily understand the nature and amount of the discount.  Unlike an individual Form 1040 which is often just the return itself that is filed; we may actually be providing hundreds of pages of information to the IRS if we are disclosing real property appraisal reports and/or a professional valuation of a business entity which would disclose the valuation discounts taken.

The moral of the story of today’s blog is to demonstrate that one should not try to file a Form 709 alone without professional assistance.  Unless a gift is made outright and consists of cash, stock, or real property with an easily demonstrated value, a CPA or tax attorney should assist you with the preparation of your gift tax return.  And even though the initial deadline is fast approaching, there is plenty of time to file for an extension, so please contact your CPA or our office if you will require assistance with a gift tax return for 2012.

The American Taxpayer Relief Act (2012 Taxpayer Relief Act) was signed into law on January 2, 2013. The Act in part permanently increased the federal estate tax exemption to $5,000,000.00 to be indexed annually for inflation (which is $5,250,000 for 2013) and established a top tax rate of 40%. As part of the new law, “portability” was also made permanent. The portability aspect of the law did not receive the publicity or attention the other aspects of the law did.  Many persons and some professionals are not familiar with portability, which permits the federal estate tax exemption to be “portable” between a husband and wife.  Portability is only available to the surviving spouse of the decedent and no other. When one spouse dies, the surviving spouse can preserve the deceased spouse's unused exemption amount for use in the future when the surviving spouse dies.  This unused exemption amount is added to the surviving spouse’s own exemption in effect at the time of his or her death.  For example, Jim Smith dies in 2013 when the federal estate tax exemption is $5,250,000.00.  He leaves a surviving spouse, Mary Smith.  Jim’s taxable estate is $3,250,000.00.  The $2,000,000.00 unused portion of Jim’s federal estate tax exemption ($5,250,000.00 exemption less $3,250,000.00 taxable estate) is portable to his surviving spouse, Mary, to be used by her in the future.  If portability is elected in Jim’s estate and Mary subsequently dies in 2013, her total federal estate tax exemption is $7,250,000.00 ($5,250,000.00 exemption plus Jim’s unused exemption of $2,000,000.00). However, portability must be properly elected by the successor trustee of Jim’s trust or the personal representative of his estate by timely filing a Form 706, United States Estate Tax (And Generation-Skipping Transfer) Tax Return, for Jim’s estate.  Mary can also utilize Jim’s unused tax exemption against any tax liability that would otherwise arise from subsequent lifetime gifts made by her.  Portability is an important and valuable estate planning tool to be considered when a person dies with a surviving spouse.   

Attorney John Mugan

As Jason, mentioned in his blog, we are writing more on the estate and gift tax consequences of the fiscal cliff.  While all of us are hopeful that there will be a political compromise with respect to both income and estate and gift taxes between now and year-end, it is likely that this will probably not be sorted out until 2013, with the compromise to be retroactive to January 1, 2013.

If Congress fails to act, and the gridlock continues, as of January 1, 2013, the following will occur with respect to gift and estate taxes:

• The federal estate tax and gift tax exemptions will drop to only $1,000,000 (a drop of $4,125,000 from the current $5,125,000);
• The generation skipping transfer tax exemption will drop to a little over $1,000,000– making gifts to grandchildren more expensive; and
• The estate, gift tax and generation skipping transfer tax rates will increase to 55% for the highest brackets (a 20% increase from the current 35% rate).
• The Nevada estate tax will return.

While, there is no “one size fits all” solution to this issue, we recommend that you maximize your gifting this year by making year end gifts so that you can pass more assets free of estate and gift taxes.

Many clients do have a concern that if they gift too much away they could run out of assets.  Popular solutions to this have been (1) have a spouse as a beneficiary of the trust and assume that as long as the spouse is alive the donor can derive indirect benefit by being supported by the spouse while the spouse is being supported by the trust, and (2) forming a Nevada asset protection trust, which we call a Nevada On-Shore Trust (a “NOST”), since the IRS has ruled in at least one case that the contributor can be a discretionary beneficiary and actually receive the benefit of trust assets if and whenever they may need it.

It is important for you to schedule a time to meet with one of our attorneys to develop a personalized plan that meets your estate planning needs. Please contact us as quickly as possible if you have any questions or if we can be of assistance between now and year end.