Looking Gift Taxes In the Mouth: Upcoming Rules for 2011

December 28, 2010
Gift box icon Looking Gift Taxes In the Mouth: Upcoming Rules for 2011

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‘Tis still the season of giving.  Thanks to a $5 million lifetime gift exemption starting in January, most of your gifts will have very little impact, if any, on your estate plan.  However, today we will discuss why you perhaps should not ignore gift tax issues just yet.

Let’s take a look at some of the current rules and circumstances.

Annual & Lifetime Exclusions

  • Any individual can give any other individual up to $13,000 each year without any gift tax consequence.  This amount may be adjusted for inflation in 2012 and beyond.
  • If both spouses consent, a married couple may give up to $26,000 to an individual.
  • In 2011 and 2012, every individual may give up to $5 million during his or her lifetime before incurring any gift taxes.  If no changes are made to federal law, this exemption will drop to $1 million in 2013 and beyond.
  • Any gift exceeding the annual exclusion in any year will reduce your available lifetime exclusion by the excess.  You will only owe gift taxes if your lifetime gifts exceed the lifetime exclusion.
  • Example 1:  You and your spouse want to give significant gifts this year to your 3 children, their spouses, and your 4 grandchildren (a total of 10 people).  Since you and your spouse can give up to $26,000 to any individual, you both would be able to give up to a total of $260,000 per year to these descendants.
  • Example 2:  You are unmarried and you want to give $100,000 to your unmarried sister.  Since your gift exceeds $13,000, you must file a gift tax return.  You won’t owe any gift taxes now, but because your gift exceeds the annual exemption by $87,000, your lifetime exemption will be reduced to $4,913,000 ($5 million less the $87,000).

Exceptions

  • Marital Gifts – U.S. spouses can give unlimited amounts to each other without any gift tax consequence.
  • Marital Gifts to non-U.S. spouses – A U.S. spouse can give up to $134,000 annually to a non-U.S. spouse, with adjustments for inflation possible after 2010.
  • Section 529 Plans – Section 529 plans are savings vehicles used for a beneficiary’s college expenses.  An individual may elect to give up to five years of gifts to a beneficiary’s “529 Plan” in one year without any gift tax consequences.  For example, a grandparent can give up $65,000 (or $130,000 with a spouse) to his grandchild’s Plan in any one year.
  • Others – In general, no gift tax applies to funds given to charity, educational institutions, and to medical facilities for the medical care of an individual.

Consequences

If you believe your assets will never reach $5 million in your lifetime, you might feel as if the gift tax is now irrelevant to you.  However, you might still pay attention for the following reasons:

  • The $5 million exemption only exists for 2011 and 2012.  If Congress cannot agree on gift tax rates for 2013 and beyond by the end of 2012, the gift tax exemption will revert back to $1 million.  In other words, this $5 million safety zone is only guaranteed to be in place for two years and not forever.
  • We have discussed at length in prior posts how “easily” your assets can reach $1 million.  Regular savings into your retirement plan, plus a paid-off house, plus any inheritances, plus a significant life insurance policy could push your estate well over $1 million.  A reduction from a potential $1 million exemption in 2013 would certainly have a greater impact than the reduction, illustrated in Example 2 above.
  • Certain intra-family loans or other activities could be deemed as gifts by the IRS that could also reduce your exemption.  We will discuss some examples in a future post.

Questions?  Comments?  Please voice them below.

 Looking Gift Taxes In the Mouth: Upcoming Rules for 2011
 Looking Gift Taxes In the Mouth: Upcoming Rules for 2011

Scott

Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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22 Responses to Looking Gift Taxes In the Mouth: Upcoming Rules for 2011

  1. December 29, 2010 at 9:23 am

    Outstanding, easily understandable explanation of this complex topic. Some interesting planning options here.

    • Scott
      December 29, 2010 at 6:37 pm

      Why thank you very much, Mr. Wohlner!

  2. el
    January 10, 2011 at 2:37 am

    If you gift say $2 million to one person in 2011 and you die in 2013 and the estate taxes limit came back to $1 million, then will the estate owe taxes on $1 million? (less the individual exemption of $13,000).

    • Scott
      January 13, 2011 at 1:13 pm

      This is an excellent question, and one that I have wondered about myself.

      Unfortunately, we can’t answer the question at this time because it will ultimately be determined by whatever law Congress passes for 2013 and beyond.

      My suspicion is that the $5 million exemption will be made permanent some time before then, given the number of bills that have been introduced in Congress during the last week or so. These bills range from extend the new tax law beyond 2012 to elimination of the estate tax altogether. Additionally, it is hard to see any Congress that will approve an exemption that reduces by $4 million.

      Thanks for your question!

      • Click
        May 18, 2011 at 11:54 am

        Example:

        1) “John Smith” gives gift of $3 million in 2011
        The exemption drops back down to $1 Million in 2013
        “John Smith” dies in 2013 with assets in total value of $800,000

        Will the estate be taxable for $2 Million because the exemption will then be only $1 Million OR sine the gift was given within the $5 Million exemption period and now the estate is only $800,000 there is no taxes?

        2) If ones estate is $6 Million will the taxes be on the $1 Million exceeding the limit OR since it is over the limit, the entire $6 Million will be taxable?

        3) What is the tax rate percentage for estate taxes? is it worth all this time planning?

        • Scott
          May 19, 2011 at 8:42 pm

          Mr. Click–

          I will answer each of your questions in turn below:

          1) In your scenario, John’s estate would not be taxable in 2013 because its value is less than the $1 million exemption. His $3 million gift in 2011 would most likely not be added to the 2013 base because it is highly unlikely that the IRS would renege or “clawback” from the benefits it has provided in 2011 and 2012.

          2) Estate taxes would be assessed on the $1 million that exceeds the limit. The first $5 million of assets are estate tax exempt in 2011 and 2012.

          3) Currently, the estate tax rate maximizes at 35% for 2011 and 2012. Because there is no guarantee that this rate and the exemption will exist beyond 2012, it is generally recommended to plan as if pre-2001 rates will be in existence in 2013 and beyond (a $1 million exemption with a maximum estate tax rate of 55%). Planning is essential whether or not you will be affected by the estate tax to provide for needs such as incapacity, protection of your family’s assets from outside influences, guardianships and conservatorships, transition of a closely-held business, etc.

          Thank you for the questions!

          Take care,
          Scott

          • Click
            May 23, 2011 at 3:36 pm

            Thank you Scott!

            The 35% or 55% you are referring to, is that Federal or state? Is there NY state estate taxes?

          • Scott
            May 25, 2011 at 12:20 pm

            The 35% rate I referred to is the federal rate. New York state has an estate tax rate that maximizes at 16%.

            Take care,
            Scott

  3. Barbara
    February 15, 2011 at 5:35 pm

    Can a parent gift 26,000.00 to his/her children if the parent’s husband/wife is deceased?

    • Scott
      February 16, 2011 at 10:06 am

      Barbara–

      I will assume you are referring to the $13,000 annual gift exemption in your question. Unfortunately, no, the exemption is limited to $13,000 per person.

      However, remember that the parent can gift any amount she wants to her children — there is no rule that limits a gift to $13,000; but any amount exceeding $13,000 in a given year will result in a reduction in the parent’s lifetime gift exemption ($5 million for 2011 and 2012).

      Let me know if you have any further questions. Thank you for your question!

      Scott

  4. Victor
    April 17, 2011 at 1:11 am

    I would like to give my father $90,000 U.S. since he has given his whole lifes work to take care of me throughout the past 56 yrs. What would my tax obligation be on the $77,000 after the $13,000 single year exemption? Also what will my Dad have to pay in taxes once I give him this money?
    Thanks for all the info you have offered from other viewers.
    ps. We both live in the U.S.

    • Scott
      April 17, 2011 at 10:32 pm

      Victor–

      What a noble gesture by you!

      As of this date (and at least through December 2012), all U.S. citizens receive a $5 million lifetime gift tax exemption. This means that during your lifetime, the first $5 million that you gift to anyone else is exempt from gift tax. In terms of gift taxes only, if you alone make this gift to him alone, your $77,000 in excess of the $13,000 annual limit is deducted from your lifetime exemption.

      Let’s assume you have never previously given a gift that exceeds the annual gift exemption. If you gave out this gift, you would still have $4,923,000 left to give out during your life with no federal gift tax consequence to either you or your father.

      Since gifts are not income taxable, your father will not owe any income taxes for receiving the $90,000.

      However, there are other factors to consider as well. First, if you are married, and your spouse approves, you may give your father up to $26,000 gift tax free. If your father is also married, you and your spouse could give your father and his spouse up to $52,000 gift tax free.

      Next, consider if instead of giving your father cash, you give him appreciated property valued at $90,000. When your father receives it, he takes on your tax basis (i.e. your cost) of the property. As a result, when he sells it, he will owe capital gains tax on the profit.

      Additionally, be sure to check out your state tax law regarding your gift transaction, as your law may differ from federal tax law.

      Finally, consider that the $5 million lifetime exemption only lasts until the end of 2012. It is unknown what will happen thereafter, but some (but not all) commentators believe it may drop back down to $1 million starting in 2013. Be sure to judge how this might affect your personal situation.

      I hope this helps.

      Take care,
      Scott

  5. Miss Sunshine
    May 23, 2011 at 9:33 pm

    My father has $80,000(US) he would like to gift to me (on top of the 1 Million he gifted to me in 2008 because that was the lifetime gift tax exemption limit that year.) Can he do so without me incurring any taxes on the $80,000 and if so what is the actual procedure, should he write a check, go to the bank for a cashier’s check and some form, what are the proper forms to file with the IRS? BTW – I have always taken care of my father which is why he so generous with me.

    • Scott
      May 25, 2011 at 12:32 pm

      Miss Sunshine–

      Without knowing more specifics, I cannot say for certain whether or not your father will owe any gift taxes. Take the following as mere commentary and not as legal or tax advice.

      Let’s assume that your father’s only gifts above the annual exemption (currently $13,000) in any year of his lifetime was the $1 million to you in 2008. In your scenario, because the federal gift tax exemption for 2011 and 2012 is $5 million, he would likely not owe any federal gift taxes on an $80,000 gift to you (if made in 2011 or 2012). However, he would probably need to file a Federal Form 709 for the year of his gift (as he should have done for 2008 as well). Here are the instructions for filing the 2010 version of Form 709. Read this closely, as there are various exceptions that could apply to either or both of the 2008 gift and the proposed gift.

      Best of luck!

      Scott

  6. Miss Sunshine
    May 23, 2011 at 9:40 pm

    Also – you are doing a very kind thing by offering people great insight on a very tricky subject. You have made it quite simple to understand.

    • Scott
      May 25, 2011 at 12:34 pm

      Well thank you so much for such a nice compliment, Miss Sunshine! That is my goal, and I am pleased to help!

      Take care,
      Scott

  7. Bob Frey
    May 26, 2011 at 6:27 pm

    I feel certain that under the exemption guidlines, I can give up to 13000 yr to ANYONE regardless of whether or not they are related to me. I cannot find documentation to support this in IRS.GOV. Can you reassure me? Thanks, Bob.

    • Scott
      May 27, 2011 at 10:30 am

      Mr. Frey–

      Section 2503(b)(1) of the Internal Revenue Code states: “In the case of gifts … made to any person by the donor during the calendar year, the first $10,000 of such gifts to such person shall not … be included in the total amount of gifts made during such year” (emphasis added). Section 2503(b)(2) allows for an inflation adjustment to that $10,000, which results in the $13,000 exemption we enjoy today.

      At irs.gov, this is further detailed in Publication 950.

      I hope this helps!

      Take care,
      Scott

  8. Manny
    June 18, 2011 at 10:59 am

    My mom is receiving close to $250k from a personal injury lawsuit. I understand that this money is tax free. Since I was the one who stuck around and helped my mother during her tough times, she wants me to have the money to do as I please with it. I am concerned about the taxes on this, and although I have come to the understanding that it wouldn’t be taxed due to the current lifetime gift exemption, I am still uneasy about it. Can you please reassure me that this would be the case? Also, I have looked rigorously for New York State/City gift taxes but have not found anything. Does such a tax exist in my state? Thank you for your time and assistance.

    -Manny

    • Scott
      June 20, 2011 at 5:19 pm

      Manny–

      Unfortunately, I am not licensed to practice law in New York, so I am unable to give you a definitive answer that you can rely on.

      The first $5 million of each person’s estate plus the amount of “taxable” gifts she gave during her lifetime are estate and gift tax exempt. You might check the Laws of New York Tax Sections 951 and 952 as your first source for New York state estate tax. These sections seem to indicate a tax on estates exceeding $1 million.

      Good luck and sorry I could not be more helpful.

      Scott

  9. MJ
    September 1, 2011 at 3:30 pm

    Thank you so much for the thoughtful commentary on the current gift opportunity. A prior question had me thinking about whether lifetime gifts (in excess of $13,000) reduce my estate tax exemption amount. My question:

    If I gift $2 million in 2011 (and file a gift tax return) and then die in 2012 with $6 million in my estate, does the $2 million gift I made in 2011 reduce the $5 million exemption amount available to my estate in 2012? In other words, would my $6 million estate be taxed in 2012 on the $1 million dollars in excess of the exemption amount? Or, would that exemption be reduced ($5 million, less the amount of my $2 million in lifetime gifts) to $3 million?

    • Scott
      September 20, 2011 at 9:45 pm

      MJ–

      Unfortunately, there is no clear-cut answer to your question as of yet. I humbly submit that I don’t believe Congress will “penalize” individuals who gift large amounts in 2011 or 2012 in the way that your question illustrates (this would also be known as a “clawback”).

      By the way, Mr. Marvin Hills of the Tax Advisor has further illustrated your concern in this recent article.

      Some commentators are concerned that a clawback will occur if the current $5 million gift tax exemption is reduced to $1 million in 2013, because any gift given in 2011 or 2012 will be subject to additional estate tax. Mr. Hills’ article describes and illustrates this effect through several scenarios.

      Sorry that I have no better answer for you.

      Take care,
      Scott

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