Let’s talk about an issue concerning gifts.
We are not talking about contributions – such as to a
charity - mind you. We are talking gifts to individuals, as in gift taxation.
The IRS spots you a $16,000 annual gift tax exemption.
This means that you can gift anyone you want – family, friend, stranger – up to
$16,000 and there is no gift tax involved. Heck, you don’t even have to file a
return for such a straightforward transaction, although you can if you want.
Say that you give $16,000 to your kid. No return, no tax, nothing. Your spouse
can do the same, meaning $32,000 per kid with no return or tax.
That amount covers gifting for the vast majority of
us.
What if you gift more than $16,000?
Easy answer: you now have to file a return but it is
unlikely there will be any tax due.
Why?
Because the IRS gives you a “spot.”
A key concept in estate and gift taxation is that the gift
tax and the estate tax are combined for purposes of the arithmetic.
One adds the following:
· The
gifts you have reported over your lifetime
· The
assets you die with
One subtracts the following:
· Debts
you die with
· Certain
spousal transfers and charitable bequests we will not address here.
If this number is less than $12.06 million, there is
no tax – gift or estate.
Folks, it is quite unlikely that the average person will
get to $12.06 million. If you do, congrats. Chances are you have been working
with a tax advisor for a while, at least for your income taxes. It is also more
likely than not that you and your advisor have had conversations involving estate
and gift taxes.
Let’s take a look at the Estate of William E.
DeMuth, Jr.
In January, 2007 William DeMuth (dad) gave a power of
attorney to his son (Donald DeMuth). Donald was given power to make gifts (not
exceeding the annual exclusion) on his dad’s behalf. Donald did so from 2007
through 2014.
In summer, 2015, dad’s health began to fail.
Donald starting writing checks for gift in
anticipation that his dad would pass away.
Dad did pass away on September 11.
Donald had written eleven checks for $464,000.
QUESTION: Why did Donald do this?
ANSWER: In an attempt to reduce dad’s taxable estate
by $464,000.
Problem: Only one of the eleven checks was cashed
before dad passed away.
Why is this a problem?
This is an issue where the income tax answer is
different from the gift tax answer.
If I write a check to a
charity and put it in the mail late December, then income tax allows me to
claim a contribution deduction in the year I mailed the check. One could argue
that the charity could not receive the check in time to deposit it the same tax
year, but that does not matter. I parted with dominion and control when I
dropped the check in the mail.
Gift tax wants more from dominion and control. One is likely
dealing with family and close friends, so the heightened skepticism makes
sense.
When did dad part with dominion and control over the
eleven checks?
Gift tax wants to see those checks cashed. Until then,
dad had not parted with dominion and control.
Only one of the checks had cleared before dad passed
away. That check was allowed as a gift. The other ten checks totaled $436,000
and potentially includible in dad’s estate.
But there was a technicality concern an IRS concession,
and the $436,000 was reduced to $366,000.
Still, multiply $366,000 by a 40% tax rate and the issue
got expensive.
Our case this time was the Estate of William E
DeMuth, Jr., T.C. Memo 2022-72.
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