2012 was a big year for gifting. Many feared the $5,125,000 estate and gift lifetime exemption would drop to $1,000,000 in 2013. As a result, they attempted to use their exemption amount by gifting before the end of the year. Now that the exemption is permanent and indexed annually for inflation, we expect gifting to remain a valuable estate planning tool.
Here are a few items your CPA should be addressing with you:
- Give the IRS too much information. The gift return is an informational return because there is a lot of information and no tax being sent to the IRS. Because the IRS asks for enough information to be sent to ‘adequately disclose’ the gift, we usually advise our clients to err on the side of too much information. If you do not give the IRS enough information, they may decide to revalue the gift in 5, 10, or 20 years down the road.
- If you are gifting to a trust for the first time, ensure your CPA has a copy of the trust document. Trusts are a common estate planning tool; many of the gift returns we prepared this year were to trusts. When gifting to a trust for the first time, we advise our clients to attach the whole trust document to the gift return.
- Have your estate attorney communicate with your CPA. Your CPA knows what you own and the tax implications of specific actions. Your estate attorney knows where you want your assets to go and the legal implications of certain actions. You need both your CPA and estate attorney to communicate so you get everything you want out of your estate plan. This is the biggest tip we give our clients. Too often, we’ve seen clients come to us after creating an estate plan only to realize the plan is either impossible or will result in tax.
- If you are gifting to a trust for the first time, have your attorney send your CPA a letter about the type of trust you have set up and why. There are many types of trusts; even the simplest are very complex to read. You want your CPA to understand the trust so they can correctly file your gift and trust returns.
- The annual exclusion for 2013 is $14,000. This means you can gift up to $14,000 to a person and not have to file a gift tax return. If you are gifting to a trust, you should consult your CPA because more complicated rules are in place for determining if a gift to a trust qualifies for the annual exclusion.
- If you are gifting property, getting an appraisal done is important. You must report the fair market value of the property you are gifting to the IRS. The best way to determine the fair market value is to get a professional appraisal done on the property. Appraisals can take a while, so you usually want to get the appraisal done as soon as possible to avoid delayed filing.
- Discounts may be available on the value of the gift. If you are not gifting 100% of the property, or if you are gifting a closely held business, you may be entitled to take a discount on the property’s value. This is another reason why a professional appraisal is a good idea. With a professional appraisal, an expert will determine the discount percentage you can take. In my experience, an expert discount is usually higher than you would normally believe.
- You need to know the adjusted basis of the property gifted. You must report your adjusted basis in the property to the new owner and the IRS on the gift return. If the property is business property or a business entity, your CPA or bookkeeper should be able to get this number for you. If you are gifting personal property, you must look at the property’s purchase price.
- Don’t waste a single cent of your lifetime exemption. Due to time limitations and the inability to get a professional appraisal, we had a few clients who filed gift returns with higher values than it should have been. Some clients believe that they will never reach the lifetime exemption amount. If they weren’t going to pay taxes, they weren’t motivated to get professional appraisals to take discounts.
While the lifetime exemption is now at $5,250,000 and is ‘permanent,’ my experience is that nothing is permanent in tax. Recently, Obama released his 2013 budget proposal, which included a $3,500,000 exemption with a top estate tax rate of 45%. The fact is that we don’t know how long this ‘permanent’ exemption will last. We know that you spent your lifetime working hard for your money. You should pay the government the correct amount of tax due and not one penny more.
For more information about gifting, call LSL CPAs at 714.569.1000.
By Suzanne Lieber
