Applause! Applause!
Congress in 1998 buried an old and onerous gift-tax killer rule. Yet few people are aware of the tax-saving advantages of the new law.
First, some background. Gifts to your spouse are sheltered by an unlimited marital deduction, no matter how much the gift — during life or at death — there is no gift tax or estate tax. For lifetime gifts to all other individuals, the first $12,000 ($24,000 if married) is also exempt from tax.
A gift-tax return is generally not required for gifts qualifying for the marital deduction. On the other hand, a gift-tax return must be filed for all gifts in excess of $12,000 per donee (the person receiving the gift) per year.
Just like your income-tax return, your gift-tax return is due on April 15. For example, taxable gifts made in 2005 should have been reported on a gift-tax return filed by April 15, 2006. The IRS has three years from the date a gift-tax return is filed to make a gift-tax assessment. So, if the IRS decides four years down the road that a gift was worth more than the value shown on your timely filed gift-tax return, it’s out of luck. The IRS cannot assess any additional tax on the gift.
In the past, there was a catch.
Again, some background. The estate and gift taxes are unified so that a single graduated rate schedule applies to cumulative lifetime and death transfers. As a result, the final tax on your estate depends on the amount of taxable gifts made during your life.
The more lifetime taxable gifts, the higher your estate tax.
Sad but true, the courts allowed the IRS to revalue gifts — even after death — in order to determine the decedent’s estate tax. While it was too late to assess additional gift taxes on the gift (because the three-year time period had run out), the revalued gift could bump the estate into a higher tax bracket and cost — often huge — additional estate-tax dollars.
If the IRS claimed that a lifetime gift — very often the stock of a family business — was seriously undervalued, the tax on the estate would skyrocket. The estate had a tough time proving that a business valuation made years earlier (5, 10, 15 years or more) was and is still correct.
OK, let’s hear the drumroll for the new law:
For gifts made after Aug. 5, 1997, the IRS can no longer revalue lifetime gifts for estate-tax purposes. You must only jump through one hoop: report the gift on a gift-tax return. The value of the gift must be shown on the return or disclosed on the return or an attachment in a manner adequate to disclose to the IRS the nature of the gift.
After three years, the IRS (and you) are bound by the values shown on the return.
The door is, however, still open for the IRS to revalue some gifts:
• Any gift made prior to Aug. 6, 1997;
• A gift-tax return is filed, but the gifts are not properly disclosed or reported;
• Gifts not shown on a return;
• No gift tax return was filed because you thought the gift was worth $12,000 or less.
Here’s what to do for absolute protection:
Except for cash gifts under $12,000, report all gifts — particularly gifts involving the stock or an interest in any kind of family business or partnership — on a timely filed gift-tax return.
The more you are worth, the more your estate plan should include a well-thought-out lifetime plan, which includes a gifting program to the next generation.
Generally, cash gifts are a no-no. Leveraged gifts (usually involving a family limited partnership (FLIP), intentionally defective trust (IDT) or one or more of the dozens of life insurance strategies, are smart. They beat up the IRS legally and keep you in control of the gifted assets for as long as you live.
Gifting (using an FLIP, IDT or life insurance) is only one of 22 strategies used to legally avoid the estate tax. Learn how and when to use all the strategies —whether you are worth $2 million or $20 million.
