Salt Lake City Estate Planning

Important Reminder for Gift Tax Returns

In the countdown to April 15, many people rushing to prepare their individual income tax returns will overlook another key tax document that’s due the same day: Form 709, covering taxable (or potentially taxable) gifts made during the previous year.

Tax year 2012 is just about to come to a close. If you made any taxable gifts in 2012, remember to file a gift tax return by the April 15 deadline along with your income tax return.

If you made any gifts in excess of $13,000 (that number is $14,000 for 2013) to anyone in 2012, then you must file a Form 709 Gift Tax Return. Period. In fact, a recent article in Forbes titled “Don't Gamble With Gift Tax Returns” considered this matter in detail.

The humble gift tax return is among the easiest tax document to forget, but it’s also one of the most important to get right. After all, the return is what the IRS uses to assess any possible gift tax. Even if you don’t actually “owe” any gift tax, you still must file the return.

Why?

Gift tax returns that raise red flags, or don’t get filed in the first place, can be audited just like any tax return. No audit is a good audit.

So, if this is new information to you and you are not ready to file your Form 709, then you can get an extension by filing a Form 8892. You may just need more time to get everything properly documented.

The original Forbes article also has some pointers when it comes to extensions. However, any gift tax must be paid by April 15, if any is owed. Otherwise, you will be hit with interest and potential penalties.

This is a hot topic this year since 2012 was such a big year for gifting.

Reference: Forbes (March 22, 2013) “Don't Gamble With Gift Tax Returns”

Ensure Your Gifts Qualify for the Charitable Tax Deduction

Make no mistake: the IRS has been cracking down on charitable contributions. It’s not that they don’t want you out there giving; to the contrary … It’s just that they want you to properly document your contribution so they can govern any abuses, particularly when the donation consists of property rather than cash.

Qualifying for the charitable tax deduction is not simply a matter of giving, then claiming the deduction. No, there are a few steps to take and items of proof to gather if you want your generosity to count at tax time.

Fundamentally, you need to prove the value of what you have given, but that can get complicated when you are giving in the form of things. You need an appraisal of any thing you give (e.g., art, a house, an easement, or a service), and you need that appraisal to answer all the tax man’s questions even before he asks them. In short, appraisals can get tricky.

For example, if you give art you need an art appraiser, and if you give real estate you need a real estate professional. However, what if you give interest or stock in a company? Then the appraisal becomes even trickier.

When you are giving less than obviously valued interest, then you might want to consider the advice given in a recent Forbes article titled “It's Hard To Satisfy The Qualified Appraisal Requirement For A Charitable Contribution If You Appraise The Wrong Property.” The problem with interest or stock in a company is that the interest or stock is different than the things the company owns. So, 10% of the stock in a company with $5 million in assets is not (necessarily) equivalent to 10% of $5 million. Such is the case, even when the sole purpose of the company is to hold well-documented and appraised assets worth $5 million.

In a “simple case,” the IRS likely will provide leniency and determine that such and such an appraisal was “substantially compliant” if not fully so. Nevertheless, the greater the business complexity, the greater the risk of misstep and attending (and costly) determination of insubstantial compliance.

An appraisal is a very necessary step when recognizing the tax implications of any transfer of property that is more than simply money itself. In the end, when giving to charity or to loved ones it just stings all the more when your attempted good deed is punished.

Reference: Forbes (February 5, 2013) “It's Hard To Satisfy The Qualified Appraisal Requirement For A Charitable Contribution If You Appraise The Wrong Property”

2012 Gifting Remorse?

After taking advantage of generous transfer taxes in a mad rush last year, and then seeing the benefits go largely unchanged in the U.S. budget deal, many donors may be looking for ways to take back their gifts.

So far, so good? Has 2013 been as scary as you anticipated? For example, if you gave away large portions of your personal fortune before the ball fell in Time’s Square, are you having donor’s remorse?

If you are suffering from donor’s remorse, then you might want to read a recent article on Financial Advisor - Private Wealth titled “After Budget Deal: Donor’s Remorse.” 

The article addresses any interest you may have in undoing a large gift. In reality, whether you can undo your gift will hinge on precisely which strategies you employed and the language used. Be sure to consult with your professional advisors on this.

That noted, however, 2012 was still a good year to give and most likely will do wonders for your overall estate plan. Don’t be too hard on yourself. After all, unless you had a working crystal ball, who knew how the fiscal cliff deal would go down? Just think if the transfer tax laws had reverted to their default settings. Your savvy gifting would have been prescient, to say the least.

Whether you currently suffer from donor’s remorse or not, there always is a lesson to be learned from every life experience. Such was the run-up to the fiscal cliff deal. What, then, are your takeaways going forward?

Reference: Financial Advisor – Private Wealth (January 11, 2013) “After Budget Deal: Donor’s Remorse”

Charitable Giving Slows for Überwealthy

America’s billionaires gave less in 2012 than in 2011, a new Chronicle tally shows.

Well in the wake of confetti and political rancor brought on by New Year’s Eve and New Year’s Day, respectively, the numbers are starting to come in on the state of charitable giving for 2012. Unfortunately, and according to a summary post by the Chronicle of Philanthropy entitled “America’s Wealthiest Donors Slow Their Giving,” 2012 was not a good year for charities or a big year for donors.

In fairness, 2012 will first and foremost go down as a year of great indecisiveness, whether it was the presidential election or the deal that brought us over the fiscal cliff. But political indecisiveness gives rise to a tricky environment for charitable intentions. That said, the largest gifts by American philanthropists totaled a whopping $5.1 billion, except when you account for the fact that Warren Buffet gave away $3 billion of that total. By comparison, the largest gifts by American philanthropists totaled $2.6 billion in 2011. Without Buffet’s gifts, the 2012 total would have been $2 billion, falling under 2011’s totals.

Now, this kind of assessment isn’t an entirely fair estimate of the direction of the charitable energies of all donors. In fact, the list only accounts for the top ten public donors, thereby ignoring the many small donors who you may recognize as those not being featured on the cover of Forbes. Nevertheless, it seems to be indicative of an overall mood.

So, if 2012 was all indecision and waiting, what can we expect in terms of philanthropy for 2013 now that we’ve got some answers and direction on the tax front?

What are your plans and what is important for you as a donor?

Reference: The Chronicle of Philanthropy (January 1, 2013) “America’s Wealthiest Donors Slow Their Giving”

IRA Charitable Rollover – A Powerful Win-Win

As part of the "fiscal cliff" deal, Congress has resurrected a popular tax-law provision, known as the "IRA charitable rollover," that had expired at the end of 2011. The rule allows many investors 70½ or older to transfer as much as $100,000 a year from an individual retirement account directly to a qualified charity without having to count any of that transfer as taxable income.

Tax law and sausage. Two things you should never watch while being made. However, the recent tax law contains at least one healthy ingredient: the IRA Charitable Rollover.

This may not be a new revelation, but it bears repeating. It is just that good. The reinstitution of the IRA Charitable Rollover will benefit many qualifying taxpayers and their favorite charities alike. An article in The Wall Street Journal titled “IRA Charitable Rollover Is Back” provided an excellent, brief summary of the practical points you should know.

Until the end of 2011, you could “rollover” the required minimum distribution (RMD) from your IRA directly into the charity of your choice. Consequently, you avoided income taxation on that amount. But what about tax year 2012? Until the American Taxpayer Relief Act (ATRA) was passed on January 1, 2013, and subsequently signed into law the next day, this opportunity for 2012 did not exist. It had expired.

Now that ATRA is law, however, if you are age 70 ½ or older you can once more kill two birds with one stone and rollover funds from your IRA directly to a charity for 2012. That’s right, there is a limited window open to go back to 2012 (figuratively speaking) and make a qualifying charitable rollover from your IRA.

As noted in the article cited above, taxpayers who took their RMDs late in December while awaiting resolution of the “fiscal cliff” debacle may still re-characterize that withdrawal into a rollover if they act now! However, this opportunity expires at the end of this month.

Reference: The Wall Street Journal (January 6, 2012) “IRA Charitable Rollover Is Back”

To Give or Not to Give

Discussions of the looming fiscal cliff have paid scant attention to estate and gift taxes. But wealthy people might do well to consider being very generous this month and giving very large gifts at today’s bargain tax prices. 

While the estate and gift tax has been in flux for the past decade, only its most recent uncertainty has forced the wealthiest to address their financial fate. A recent Forbes article, Give Now or Pay Later: Rich Face Dilemma With Fate Of Estate And Gift Taxes Up In Air, discusses, in plain language, the consequences of giving now or waiting.

Basically, the current estate and gift tax exempts $5 million of gifts or bequests and taxes any excess at 35 percent. And unless Congress takes action, on January 1, the tax will return to a $1 million exemption with the excess taxed at 55 percent. Accordingly, the wealthy may want to consider giving large gifts before the end of the year.

However, proceed with caution. If you are gifting assets to your nephew that have appreciated in value, your gift comes with your basis – the amount you paid for the asset. If your nephew sells the asset, he will owe tax on both your capital gain and any appreciation after the gift. If your nephew inherits the asset, however, he will only owe capital gains tax on the gains that occur after inheriting the assets. 

The undetermined fate of the federal estate and gift taxes has the potential to cause the wealthy to make ill-advised gifts. To avoid making one of these ill-advised gifts, and potentially costing you or your loved ones millions of dollars, consult with your estate planning attorney in advance.

Reference:  Forbes (December 17, 2012) “Give Now of Pay Later:  Rich Face Dilemma With Fate of Estate and Gift Taxes Up In Air”

Giving Gifts While Maintaining Your Financial Goals

How much can you realistically afford to gift without jeopardizing your own financial security? The question is complex and the right answer might be the wrong answer!

As you may know, current law allows you gift a large sum of $5 million (more than $10 million for married couples) without triggering any gift taxes. Since the law is set to expire at the end of 2012, many are left guessing as to what will happen next year and gearing up for a very “gifted” 4^th Quarter. But as you make plans to take advantage of the gift tax savings, have you carefully considered your own financial needs and goals?

From a tax planning standpoint, there may never be a better time for you to make a large gift. But, you know that life is about more than tax planning. The real question you need to answer, if you are inclined to make substantial gifts, is whether – and how much – you can afford to give. Wealth Strategies Journal recently published an article, “How Much Can You Gift,” to help you through the decision process.

Some things to consider:

• Your personal goals, especially for retirement. Will they still be adequate after your generous gift?
• Your age and health. Do you have many more income-producing years ahead, or is it possible you may need more money to provide for yourself and your spouse, especially if there are health issues to consider.

Consult the cited article for more gifting considerations. For example, you should not gift away – in any form – assets that are essential for your own financial needs. You can gift away assets to your children (or trusts for them) that you will never need. And don’t forget about estate planning tools that can help you make gifts that you may need, with “just in case” access if you do. Seek appropriate legal counsel for more information.

Reference: Wealth Strategies Journal (November 8, 2012) “How Much Can You Gift”

Intentionally Defective Grantor Trust (IDGT)

So what are one’s options when one has the requisite intention without the ability to write a check or transfer portfolio assets to a trust?  For many reasons, I’m a fan of gifting one’s personal residence to an intentionally defective grantor trust (IDGT).

When it comes to transferring real estate, you have many options. However, one you ought to investigate is the Intentionally Defective Grantor Trust (IDGT).

The ins and outs of the venerable IDGT was explored recently in a Forbes article titled “Reduce Estate Taxes Without Reducing Your Liquidity.” It’s better not to wade too deeply into what makes an IDGT “intentionally defective,” except to say it creates a unique tax situation. Moving the real estate (perhaps your personal residence) into the IDGT will count as a gift in the year you make the transfer, even though you’ll still be living in the house. Effectively, you are setting up your own trust as a landlord, and yourself as tenant, complete with rent payments into your own trust. Properly done, in the process you will enjoy a great number of tax advantages.

Employing an IDGT to transfer the family home may be a perfect technique to maximize your wealth transfers, particularly in a soft real estate market with an uncertain estate and gift tax future.

Could an IDGT be a clever estate planning move for you? Seek professional counsel to find out more.

Reference: Forbes (September 4, 2012) “Reduce Estate Taxes Without Reducing Your Liquidity”

Safeguarding Your Inheritance

The issue of what you can give away and how is especially relevant now because unusually favorable estate- and gift-tax rules are set to expire.

Giving to loved ones in the form of an inheritance is an important matter in one’s estate plan.  Careful planning can help ensure your control over the use and enjoyment of your gifts after your departure.

Recently, The Wall Street Journal considered the notion of goal-driven bequests in an article titled “How to Control Your Heirs From the Grave.” Good news: there are steps you can take now to guarantee that certain preconditions are met before inherited assets can be released or used.

So, what kind of “guarantees” do you want to ensure after you’re gone? That depends on you, your family, and what is of true importance to you. Maybe you want to curtail irresponsibility by calling for a drug test before receipt of an inheritance, or encourage responsibility by requiring a college degree.

Since there are limits to the guarantees you can secure, you should seek competent legal counsel to aid in your wealth transfer planning.

Reference: The Wall Street Journal (August 10, 2012) “How to Control Your Heirs From the Grave”

Estate Planning and the Annual Gift Exclusion

"Given the uncertainty about next year's estate taxes, using this exclusion is often a good idea," says Beth Kaufman, an estate-tax attorney at Caplin & Drysdale in Washington.

The uncertainty of estate taxes may make you feel uneasy, but rest assured – there is still one safe bet for your wealth transfer plans in the form of the annual gift exclusion.

The Wall Street Journal recently took up the praises of the annual gift exclusion in an article aptly titled “The Gift That Keeps Giving.” Indeed, gifts will keep giving, and it’s important to know how they work and how to give them appropriately.

Currently you can give up to your annual exclusion to as many parties as you wish each calendar year, without any corresponding reduction in your lifetime gift/estate tax exemption. The current annual gift exemption is set to $13,000 and will expand with inflation.

Don’t forget, if you are married, “gift splitting” is a way to give $26,000 to your loved ones. This is especially important in blended families when the entire $26,000 will be coming from separate resources of one spouse to his or her own children. Note: there is some simple IRS paperwork required to make this work.

Maximizing the annual gift exclusion truly is a simple yet important way to transfer your wealth. Your professional counsel can help guide you through this gifting process.

Reference: The Wall Street Journal (August 17, 2012) “The Gift That Keeps Giving”