What we learned from the Estate Planning Seminar at the Fremont Main Library held on January 24:
The gift tax law is complex and we best leave specific situations to the lawyers, but there are some simple and every day common mistakes most people make.
For instance, if you put your child or other relative on your savings account, give your child some stock, and perhaps put your house in a joint account with your child or favorite relative they will inherit a huge tax burden!
To put someone, outside of your spouse, on a savings account incurs a gift tax and the IRS keeps track of your giving every year. You are entitled to give 13,000 (this year and last year) to someone, but any amount above that will incur a gift tax which needs to be paid or this extra amount will be taken off the life cap of 5 million (1 million in 2010). This gift tax amounts to 35% this year and in 2010. Beware of 2013 when the life time cap may again be 1 million with a 45% tax rate above the amount unless the estate gift tax law is repealed.
If you gave someone (outside of your spouse) stock or added them to the deed of your house that person will incur a heavy tax when they try to sell the stock or the house since they will be the owner of the basis of the property plus any added value or capital gains. If you pass these properties at death then all appreciation is wiped out and there are no capital gains to be paid. Also, with real property, creditors may have access to the property. Also, think of the gift consequences when you make this transfer, it could be huge since it is over the 13,000 limit.
Take advantage of giving a gift this year to someone which is less than 13,000, but you can give a gift to as many people as you wish. With your spouse you can give up to 26,000 to any one recipient. Never name your child on your property or your stock if you love them, instead pass it on at death.
Below is an article from Forbes which summarizes the Gift Tax Law.
Gift Tax Under The 2010 Tax Relief Act (P.L. 111-312): Different Rules For 2010, 2011 & 2012
Dec. 29 2010 – 8:25 pm | 8,884 views | 1 recommendation | 5 comments
By HANI SARJI
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (2010 Tax Relief Act), which President Obama signed into law on December 17, 2010, makes significant changes to the gift tax.
Different Years, Different Rules
The 2010 Tax Relief Act keeps the gift tax rate and exemption the same as it was under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA): 35% tax rate and $1 million exemption for individuals.
2011 and 2012
The 2010 Tax Relief Act keeps the gift tax rate at 35% for 2011 and 2012, but the gift tax will be significantly different in 2011 and 2012.
(1) Higher exemption. The gift tax exemption for 2011 and 2012 is increased from $1 million to $5 million for individuals. So, individuals who used their entire $1 million gift tax exemption prior to 2011 will be able to gift an additional $4 million in 2011 and 2012 without incurring a gift tax.
(2) Unified exemption. The gift tax exemption will be reunified with the estate tax exemption, starting 2011.
(3) Indexed for inflation. Starting 2012, the gift tax exemption will be indexed for inflation.
(4) Portable. In 2011 and 2012, the gift tax exemption will be portable. Portability allows a surviving spouse to use the amount of estate and gift tax exemption not used by the decedent spouse. For an explanation, see Deborah L. Jacobs, Married Couple’s Guide To The New Estate Tax Law, Forbes, Dec. 23, 2010.
This table provides a summary of the gift tax rules in 2010, 2011, and 2012 (references are to the text of 2010 Tax Relief Act, as introduced by Senator Reid (PDF)):
Gift Tax Strategies
The changes that the 2010 Tax Relief Act has a number of implications for estate planning.
(1) Changes year-end planning.
Many older, wealthy people were waiting until the end of the year to make large taxable gifts. Under EGTRRA, there was no estate tax in 2010, but it was scheduled to return in 2011 with an exemption of $1 million and a tax rate of 55% (60% in some cases). Also, under EGTRRA, the gift tax rate was scheduled to jump from 35% in 2010 to 55% in 2011 (with an exemption of $1 million). The idea was to make large taxable gifts and pay a gift tax of 35%. A transfer in 2010 under EGTRRA would have saved at least 20% compared to a transfer (either during life or upon death) under the rules that were scheduled for 2011. A 20% tax savings is significant.
The 2010 Tax Relief Act changes this year-end planning. Taxable gifts for clients in the $5 to $10 million dollar range probably should not be made in 2010. The reason for this is that the exemption under the 2010 Tax Relief Act jumps from $1 million in 2010 to $5 million in 2011. So, by waiting just a few days, money can be transferred by gift without incurring a gift tax.
(2) Limits the 2010 GST tax opportunity.
As I wrote in an earlier post, Congress provided the wealthy a tremendous generation-skipping transfer tax opportunity just for 2010. The 2010 Tax Relief Act reinstated the GST tax in 2010. But Congress is providing a GST tax “holiday” because the GST tax rate in 2010 is 0%.
The $1 million gift tax exemption in 2010 acts as a limit or cap to the 2010 GST tax opportunity. At a minimum, it makes decisions regarding whether to take advantage or pass on Congress’ 2010 GST tax gift more complicated.
Still, distributions in 2010 from non-exempt GST tax trusts can generally be made without incurring a gift tax. (If you have further questions about the GST tax opportunity in 2010 and whether it is right for you, you should consult your estate planning advisor immediately. Time is of the essence as this opportunity is only around for a few more days.)
(3) Creates gifting opportunities in 2011 and 2012.
The gift tax in 2011 and 2012 will be levied at a rate of 35% and with an exemption of $5 million that is portable.
(a) People who were once limited by the $1 million gift tax exemption will be able to gift up to the new limit.
(b) The $5 million exemption can be stretched with proper estate planning. Congress did not change the rules for grantor retained annuity trusts or for valuation discounts. It had been threatening to significantly restrict these estate planning tools. So, they can be used in 2011 and 2012 (so far). (Further, planners who make seed gifts before selling to intentionally defective grantor trusts will use the higher exemption to transfer tremendous amounts of wealth. I am planning to discuss this strategy in a separate post.)
- Deborah L. Jacobs, How the New Tax Law Affects Your Estate Plan, Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide (Update 2) (a summary that everyone can understand).
- Joint Committee on Taxation, Technical Explanation Of The Revenue Provisions Contained In The “Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010″ Scheduled For Consideration By The United States Senate (JCX-55-10) (summarizing H.R. 4853; providing a plain English explanation of the law before EGTRRA, under EGTRRA, and as reformed by H.R. 4853).
- Steve R. Akers, Estate, Gift and Generation-Skipping Transfer Tax Provisions of “Tax Relief… Act of 2010,” Enacted December 17, 2010, ACTEC, Dec. 21, 2010 (a technical discussion of the changes; cites to the 2010 Tax Relief Act).
- Hani Sarji, Gift Tax: Changes Made by the 2010 Tax Relief Act (visually presenting the changes that the 2010 Tax Relief Act makes to the gift tax, IRC § 2505).