Category Archives: Gift Tax

2014 Federal Gift and Estate Tax Update

By Attorney Ted Brown

TaxCredits_Flickr_TaxJarEffective January 1, 2014, the unified federal gift and estate tax exemption was increased to $5.34 million dollars. This change reflects an adjustment for inflation from last year's 5.25 million exemption amount. In January 2013 as part of the “fiscal cliff “ negotiations, Congress established the limit at $5.25 million to be adjusted annually for inflation.

What this change means is that an individual can now give up to $5.34 million during their lifetime, or pass away with an estate valued up to $5.34 million dollars, without paying any Federal gift or estate tax.

The annual gift reporting limit remains at $14,000 per person. Total annual gifts less than this amount do not need to be reported and are not subject to gift tax. Total annual gifts in excess of this amount count against the donor's $5.34 million lifetime gift exemption.  

Photo by: Tax Credits on Flickr


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The Dangers of Gifting Real Estate

By Attorney Ted Brown

In previous blogs, I have discussed ways to use an irrevocable trust to reduce estate tax liability. I have discussed a technique known as controlled gifting. One issue that arises in many of these situation is that of capital gains tax.

Capital gains tax applies to the sale of appreciated assets such as land or stocks. The tax is based on the profit that one earns on the sale. For example, if you buy a piece of land for $100,000 and you sell it for $225,000, you have a capital gain of $125,000. This is subject to a tax rate of 15-25% plus an additional 5% of state income tax on the gain.

In an effort to get assets “out of their estate” so as to be protected from estate tax as well as a nursing home , many people consider deeding their real estate to their children. This is a very risky strategy for a variety of reasons.

A gift of property during the owner's lifetime results in a carry-over of the original sales price to the recipient. When the recipient eventually sells, they will owe capital gains tax on the difference between the sale price and the price that the original owner paid. Depending on how much the property has appreciated over time, this could result in a stifling capital gains tax problem for the recipient.

Moreover, if the property is in the hands of someone else, it is subject to the liabilities of that person. Suppose the recipient gets sued or divorced. The entire property could be lost to pay their debts leaving you without a place to live.

Finally, the Medicaid rules count a gift of any kind made within 5 years as if it is still yours. Even though you no longer own the property, you will not qualify for Medicaid until its value is “spent down.”

It is very important to understand the many potential consequences of gifting any assets, particularly real estate, before embarking on such a plan. An Elder Law Attorney can explain the many complexities of gifting and asset protection.  

Grandchildren Trusts: A Way to More Safely Give Gifts to Children

By Attorney Renee Fox

Many grandparents want to pass their wealth to their families while they are still alive. Gifts to grandchildren can be a good way to reduce a taxable estate and you can give a child or grandchild $13,000 (in 2010) a year without incurring estate taxes on the gift.  However, you probably don’t want a young child receiving the money outright.  A “Crummey” trust provides a way to take advantage of the gift tax exclusion while keeping the money in a trust until the child is old enough to manage it.

You may have heard of “custodial accounts” for kids, set up through the probate court in your area where the parent or guardian watches over the child’s account until they are of age. The downside of these accounts is that the child has the right to the money when he or she reaches the age of majority. Most of our clients believe that an 18 year olds are not mature enough to handle a large sum of money.

The benefit of putting money for a child into a trust rather than a custodial account is that you can decide when the money will be given to the child and how much the child will receive. But putting money into a regular trust presents one big problem: In order for the gift to avoid being taxed, the child must have a “present interest” in the money. Because a promise to give someone money later does not count as a present interest, most gifts to trusts aren’t excluded from the gift tax.

The Crummey trust is designed to allow you to put money into a trust

and receive a gift tax exclusion. The trust includes a provision that gives the beneficiary a temporary right to withdraw money from the trust. After a certain amount of time has passed (usually 30 days), the beneficiary can no longer withdraw the money and it becomes a part of the trust. It is very important that you notify the beneficiary of the gift and his or her right to withdraw the gift or the IRS will not apply the gift tax exclusion. There is the risk that the beneficiary will withdraw the money right away, but you can make it clear (but not in writing) that any withdrawals will mean that he or she will not get any more gifts from you. Once the money is in the trust, you control how much the beneficiary can receive and when.

Before setting up a trust, be sure to talk to the attorneys at the Cooper Law Firm to understand your options and determine the best option for your particular situation.

Annual Gift Tax Exclusion for 2009 is $13,000

A lot of people think that they can only give one $10,000 gift each year without having to pay a federal gift tax. If you are planning to make a gift (or gifts) this year, read on, and, it might be worthwhile for you to visit your favorite elder law attorney to discuss the pros and cons of gifting.

What is the Gift Tax?

It is a Federal Tax assessed on the value of property (money, real estate, stocks, bonds, jewelry, etc.) gifted from one person to another, not including their spouse.

How much can you give?

For 2009, you can give $13,000 each year (most people remember when it was $10,000/year) to as many people as you wish. If you are married, you and your spouse can gift $26,000 this year to as many people as you wish without a gift tax. This is called the “Annual Exclusion”.

Why is it called an Exclusion?

It’s called an exclusion because you don’t have to file a tax form or pay a gift tax for these gifts.

When do you have to pay Gift Tax?

If you make a gift larger than the Annual Exclusion amount to any individual in any one year, you should file a gift tax return, Form 709, in that year. You will not pay gift tax unless all of your gifts over the Annual Exclusion amount that you made during your lifetime added together are more than $1 million (2009 rate).

Who pays the Gift Tax when it’s due?

The person making the gift pays any tax due and files a related Form 709. The form must be submitted and the gift tax paid on or before April 15th of the year following your gift. The persons(s) receiving a gift has no income tax due – the gift is not added to their income.

Why do people give these gifts?

Many do so to reduce their estate at death. In Ohio, only those gifts given within the past 3 years are included in your taxable estate at death. For Federal gift tax purposes, all gifts given over your entire lifetime that are over the Annual Exclusion are included.

So what’s the downside of the $13,000 gifts?

There is a big downside! You must be careful if you might want to apply for government benefits in a nursing home situation. The government may view these gifts as an improper transfer and this could disqualify you from nursing home benefits.

What’s the moral of the story?

See your elder law attorney before you gift. They can tell you the good and the bad of gifting as it relates to your particular situation.

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