Articles Posted in Gift Tax

Back at the end of 2010 when the Estate Tax had disappeared for a brief moment in time, Congress and the President agreed on a new and improved version of the law that raised the Federal Estate tax exemption to $5,000,000 for each individual. However, in the combined wisdom of these lawmakers, the modified tax provisions were to take effect for only two years and were scheduled to expire at the end of 2012 as part of the dreaded fiscal cliff. Certainly it did not seem to matter to the leaders that individuals who were engaging in Estate Planning and Gift Planning had no idea as to what plan they should follow after December 31, 2012.

Fortunately, before the bell tolled on 2012, the estate tax exemption of $5,000,000 (adjusted for inflation), was made a permanent structure of the Federal Estate Tax. There was a small change in the estate tax rate that increased the tax rate to 40 percent.

For New York State residents, there was no change to the $1,000,000 exemption. Also, the annual federal gift tax exclusion continues to rise with inflation and is presently at $14,000 for each individual gift.

The law that was recently passed is called the “American Taxpayer Relief Act of 2012”. However, it is questionable whether most taxpayers are relieved since the recent payroll tax reductions are eliminated resulting in fewer dollars in most wage earners paychecks. A summary of some of the most relevant tax changes is set forth in an article by Steve Parrish in Forbes on January 9, 2013 entitled “What the New Tax Law Really Means and New ‘Tax Price Points.’
Since Federal and New York State Estate Taxes appear to be here to stay, it is always a good idea to review an estate plan every few years. New York Estate planning lawyers know that even if there does not appear to be any tax impact, updating documents such as a Last Will, Living Will, Living Trust, Health Care Proxy and Power of Attorney is important to reflect changes in life and beneficiary planning. Estate planning is not just about taxes. The more mundane issues relating to the smooth transfer of assets and avoiding estate battles such as Will contests is always a paramount goal. This is especially true for business owners where estate planning papers and business agreements such as Shareholder Agreements are needed for effective business transition in case of death or disability.

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New York Estate Planning Lawyers are often asked by their clients about making gifts to family members or friends or charities. When considering a gift there are a number of items that should be part of a list of basic considerations.

1. It is important to identify the person to whom the gift is to be made. While this seems rather basic, it is not always easy to provide a gift to the person to whom you want to benefit. For example, if you desire to make a gift to a grandchild or other person who is a minor, some alternative method such as a trust or a Uniform Gift to Minors Act account may be needed since the minor cannot receive the asset in his or her own right. It may be that the donor of the gift may not want to make a gift that is in a trust or a restricted account and may feel comfortable just providing funds outright to a minor’s parent with the confidence that the parent will use the gift solely for the minor’s benefit.

A similar situation may arise where an individual desires to gift assets to a person who is disabled or incapacitated. Such situations may require the establishment of a Supplemental Needs Trust to protect the governmental benefits received by the intended donee.

2. Another consideration is the financial effect that the gift may have on the donor and the donee. Thought should be given as to whether the donor can afford to make the gift and whether the loss of the asset will affect the donor’s standard of living or future retirement planning. As to the donee, it should be determined whether receipt of the asset might increase the donee’s income tax bracket or create complications regarding the donee’s estate plan by exceeding federal or state exemptions. Additionally, the donee’s physical condition may be a factor since it would not be beneficial to provide assets to a person whose medical costs may skyrocket, especially where those costs might be paid by government programs such as Medicaid.

3. Of course, the gift tax impact of any gift is always important. This is especially true at present since the current Federal tax laws allow a combined estate and gift tax exemption of just over $5,000,000. In view of the uncertainty of the future of this exemption after December 31, 2012, many high net worth individuals are looking to use up their exemption by gifting assets having a value of up to $5,000,000 before the end of the year.

While such a planning step appears to be beneficial, there are certain circumstances where the gifting of assets can be troublesome. A recent article in Forbes on November 19, 2012 by Peter J. Reilly, “IRS Position on Wandry Decision Makes 2012 Gifting More Difficult“, provides an excellent discussion of some mine-fields. As reported in the article, the IRS has announced its non-acquiesence to a Tax Court memorandum opinion which essentially allowed a donor, through a formula clause, to modify his gift percentage interests of a family LLC after the IRS had revalued same.

In the event the IRS revalues a gift after an audit, the possibility exists that the $5,000,000 exemption gift is determined to really be a $7,000,000 gift resulting in thousands of dollars of unintended gift taxes being due.

As in all estate and trust and estate planning contexts, it is necessary to consider both the practical and tax implications of asset transfers and the manner in which such dispositions are made, whether by a gift, a Last Will and Testament and a Trust. Discussions with other family members and advisors such estate planning lawyers and accountants is the best method to avoid unintended results.

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Estate settlement in New York, including Westchester and Suffolk counties, requires a consideration of many issues. A post in the New York Probate Lawyer Blog on December 6, 2011 talked about a number of estate tax issues that should be considered, including the current $5 million federal tax exemption and “portability” of the unused exemption between spouses.

Executors and Administrators have the fiduciary responsibility of calculating and preparing both Federal and New York State estate taxes, as well as fiduciary estate income taxes. Once an estate comes into existence it is like an ongoing business. Assets must be determined and collected and liabilities and debts need to be paid or resolved. Essentially, the fair market value of the assets owned by a decedent at death will form the basis for determining the estate tax obligation. The income and expenses generated by the estate during the course of Estate Administration are factors to be considered in determining the estate’s annual income tax liability.

Estate taxes are typically due to be paid nine (9) months after the decedent’s date of death. Fiduciary income tax returns are usually due in April. Extensions for the filing of estate tax and income tax returns are routinely obtained but estimated payments on account of the taxes due must be timely made or interest and possibly penalties can be imposed.

The problem faced by many fiduciaries is obtaining enough information about assets, income, expenses and liabilities in a relatively short period of time so that accurate returns can be prepared and appropriate estimated payments can be made. This process can be complicated where the decedent’s assets and income are not easily discovered or are complicated by issues of valuation or litigation regarding ownership. Nassau estate attorneys, like estate attorneys throughout New York, work closely with executors, administrators and trustees to obtain necessary information and plan for the filing and payment of these taxes.

An example of such problems was recently reported with regard to the estate of Brooke Astor. Many articles have been written concerning the estate of socialite Brooke Astor who died on August 13, 2007 and whose son was convicted of stealing her assets. In an article written by William P. Barrett which appeared in Forbes on December 7, 2011, it was reported that the IRS is seeking upwards of $62 million in taxes from the estate, which includes millions of dollars in assessed penalties. The tax disputes seem to concern charitable deductions that the IRS is refusing to recognize along with the failure of the decedent to file and pay certain gift taxes during her lifetime.

It is not uncommon for actions and failures to act by a decedent during life to have a dramatic effect upon estate settlement and, ultimately, estate beneficiaries. Suppose a decedent due to illness or neglect failed to file or pay income or gift taxes during the years prior to death. The estate fiduciaries have a fiduciary obligation to prepare these old and overdue tax returns and pay the tax liability along with any interest and penalty charges. Such payments may have a large impact upon the amount of monies that pass under a Last Will or by intestacy to the decedent’s beneficiaries. The advice and counsel of estate attorneys is essential when dealing with these matters.

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The Estate Tax continues to generate many articles and much analysis. As previously reported in the New York Probate Lawyer Blog, the changes in the Federal Estate Tax that occurred in December 2010 resulted in increasing the Federal estate tax exemption to $5 million dollars for 2010, 2011 and 2012. The Federal gift tax exemption for 2010 was $1 million but will increase to $5 million for 2011 and 2012. Also, during these years, the 100% marital deduction will remain and the new legislation introduces the new concept of “portability” which allows a decedent to transfer his or her unused federal estate tax exemption to a surviving spouse.

While these new tax provisions may protect more estates from potential federal estate taxes, tremendous uncertainty still exists. The new estate tax provisions expire at the end of 2012 after which the exemption shrinks to $1 million. Adding to the complexity is the New York State estate tax which currently has an exemption of only $1 million. Thus, if a decedent’s estate transferred more than $1 million to a non-spouse, the estate may be subject to New York estate tax. For example, if a decedent’s estate was $2,000,000 and was inherited by children, the $5,000,000 federal exemption would result in no federal estate tax. However, a $2,000,000 estate would result in a $99,600.00 New York estate tax.

Consulting with a New York estate planning attorney is important both to plan an estate for the future and to help with estate settlement and administration following a death. One important aspect of post-death planning can involve the use of the new “portability” provision. A key aspect of preserving the unused portion of a decedent’s federal exemption is to timely file a Federal estate tax return (Form 706). In a recent article in Forbes by Robertson Williams, dated November 30, 2011,The Coming Flood of Estate Tax Returns, the author notes that many tax returns may be filed for the sole purpose of preserving the portable exemption from one spouse to the other.

Estate Executors and Administrators have the fiduciary responsibility of collecting estate assets, paying debts and expenses, and preparing and filing estate tax returns. In view of the complexity of the tax laws, the job facing the fiduciary is not easy. Consultation with probate and estate settlement lawyers and other tax advisors is essential to protect estate assets and take advantage of all deductions and exemptions.

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Market Watch recently published some estate tax tips for married couples. New York City estate planning attorneys have been dealing with the changes to the estate tax and gift tax limits since they were implemented late last year.

As we reported in December on our New York Probate Lawyer Blog, Congress set the estate tax exclusion at $5 million and the lifetime gift-tax limit at $5 million. The tax exemption ends at the end of 2012. But for now, couples enjoy tax-free giving power and the vast majority of the nation’s estates may pass to heirs tax free.Unlimited Marital Deduction: For spouses who are U.S. citizens, there is no limit to the tax-free inheritance they can receive. However, it does not negate the need for estate planning in New York: Leaving your spouse a large estate could mean that he or she exceeds the limits, which would subject the estate to excessive taxation upon his or her death.

Portable Estate Tax Exemption: This year and next (2011 and 2012), you may direct the executor of your estate to leave any unused federal estate tax exemption to your surviving spouse. This includes your $5 million exemption and means a spouse could have a $10 million exemption for estates distributed this year or next. Unless Congress acts, these portable exemptions are set to expire at the end of next year.

Donate to IRS-Approved Charities:
Giving to IRS-approved charities as part of a comprehensive estate plan is a great way to get your estate down to the $5 million estate-tax cap — or $10 million for couples with both available exemptions.

Give Gifts to Relatives: The annual gift-tax exclusion is $13,000, which can be given without reducing your lifetime $5 million federal gift-tax exemption. If you had two children and four grandchildren, you and your spouse could each give $13,000 to each one, or $156,000 tax free for 2011. You could do the same thing next year and reduce your taxable estate by $312,0000.

Pay School Expenses or Medical Bills for Relatives: Aside from room and board, you can give unlimited amounts for these purposes,without reducing your gift-tax or estate-tax exemption. Payments must be made directly to the school or medical provider.

Give Away Appreciating Assets: Use your $5 million gift-tax limit to give away appreciating assets now — while they are worth less than they will be at the time of your passing.

Use an Irrevocable Life Insurance Trust: While life insurance proceeds are usually income-tax free, they are included in your estate for estate-tax purposes. Policies held in irrevocable trust are free from estate-tax exposure. This is particularly critical for single people — married people can pass the proceeds to a spouse tax free using the marital deduction privilege (though they may then face taxation upon the death of a spouse). Such trusts are a terrific way to cover estate taxes upon your death.

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The gift-tax cap could increase to $10 million — up from the current limit of $2 million — under the tax-cut bill Congress is debating this week, Bloomberg News reported.

Those worried about estate taxes should consult an experienced probate attorney to establish a comprehensive New York estate plan. One of the reasons such planning can be so crucial is the advantages of the gift-tax exemption, which can permit you to distribute thousands of dollars to your children and other heirs tax free. Such giving not only allows you to give loved ones a larger inheritance while saving thousands in taxes, it gives you an opportunity to see the difference your money is making during your lifetime. Making a promise to tackle your estate planning as part of your New Year’s resolutions can bring the peace of mind that comes with knowing your life’s work will benefit your children, not the government tax collectors.Under the proposal, a U.S. taxpayer’s lifetime gift-tax exclusion will jump to $5 million in 2011, up from the current $1 million. Each parent could donate to a child, moving as much as $10 million in cash, stocks or portions of a family business outside a couple’s estate. The window is only slated to last for two years, so those interested should begin planning as soon as possible by speaking with a qualified attorney.

The lifetime gift-tax limit has been $1 million since 2002. In addition to the new lifetime gift-tax exclusion of $5 million, couples can continue to give up to $26,000 a year tax free to each beneficiary ($13,000 for a single person).

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Those focused on what the government might do with the estate tax next year are forgetting about the likelihood of an increase in the gift tax.

Estate planning attorneys in New York City and elsewhere are helping clients disperse portions of their estate this year to take advantage of the historically low 35 percent gift-tax rate, Bloomberg News reports. As we reported recently on our New York Probate Lawyer Blog, the estate tax hiatus will last through the end of the year but could return next year with a rate as high as 55 percent on estates valued at more than $1 million.

Changes to the gift tax could come as lawmakers debate tinkering with the estate tax; more plans than can be counted are currently floating through Congress.

In response, some estate planners are assisting clients with making gifts while they are still alive. Bloomberg News uses the example of an 84-year-old widow who gathered her children at her lawyer’s office and told them she was distributing $20 million as a Christmas gift.

The woman said she didn’t want anyone wishing she were dead; and the historically low 35 percent gift tax is lower than the 55 percent estate tax rate that could return as soon as January.

New York Times columnist Paul Krugman has called the Dec. 31 deadline the “Throw Mamma from the Train” law as black humor abounds about wealthy parents having accidents before the estate tax returns with the new year. Taking advantage of the current gift tax rate is a viable alternative to such drastic and unlikely measures.

Historically, the gift tax has been matched to the estate tax to keep the wealthy from giving their money away to avoid the Internal Revenue Service. This year, you can gift up to $13,000 without tax consequences, up to a $1 million lifetime maximum. After that, the current 35 percent gift rate applies.

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