Gifting in 2012 and Beyond
| Publication year | 2012 |
| Pages | 53 |
2012, April, Pg. 53. Gifting in 2012 and Beyond
April 2012
Vol. 41, No. 4 [Page53]
Trust and Estate Law articles are sponsored by the CBA Trust and Estate Section. Topics include trust and estate planning and administration, probate litigation, guardianships and conservatorships, and tax planning.
Coordinating Editors
David W. Kirch, of David W. Kirch, P.C., Aurora-(303) 671-7726, dkirch@dwkpc.net; Constance D. Smith, of Fairfield and Woods P.C.-(303) 894-4474, csmith@fwlaw.com
About the Author
James R. Walker is a partner with Rothgerber Johnson and Lyons LLP and a Fellow of the American College of Trust and Estate Counsel and the American College of Tax Counsel-jwalker@rothgerber.com.
In periods of extreme uncertainty, estate and gift tax planning challenges the most capable client. During 2012 and beyond, gifting offers a path to reduce federal transfer taxes. This article provides a roadmap for understanding gifting issues during these uncertain times.
At the end of 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Act)(fn1) enacted historic federal estate and gift tax reform. In the Act, the U.S. Congress increased the applicable exclusion amount to $5 million,(fn2) reduced the top estate and gift tax rate to 35%,(fn3) and created a new portability option for qualifying spouses.(fn4) As in previous years, federal estate and gift taxes are "unified," such that one applicable exclusion amount is available to offset federal gift tax on cumulative lifetime transfers, with any remaining amount available to offset federal estate tax.
This historic reform is only temporary. By its terms, the favorable exclusion amount and 35% rates expire on December 31, 2012.(fn5) In light of the current legislative gridlock, it seems possible-perhaps even likely-that the 2010 reforms will simply expire.
Without intervening legislation, a significantly lower federal tax exemption amount and significantly higher transfer tax rates will spring back into effect. Beginning in January 2013, taxpayers may be faced with an applicable exemption amount of $1 million(fn6) and a possible top tax rate of 55%.
For Colorado residents gifting Colorado property, these issues will be played out in the federal arena. Colorado eliminated its separate state gift in 1980. Moreover, Colorado's separate estate tax was eliminated when Congress changed state taxes to a deduction rather than a credit against the federal estate tax. Due to the TABOR constitutional provisions, the Colorado legislature could not independently reenact a new estate tax.
Gifts Made in 2012
Historically, clients have used lifetime gifts to remove future income and future appreciation from their taxable estates.(fn7) When faced with a much smaller applicable exclusion amount and higher tax rates, wealthy clients may proceed with 2012 gifting, believing they will secure the larger exclusion and lower rate before these benefits disappear.
However, Congress anticipated such action. In new Section 2001(g), Congress provided that the estate tax rates in effect at the decedent's death (along with the current exclusion amount) will be used to compute the gift tax payable on gifts made before the decedent's death.(fn8) In other words, it seems that this planning will not secure the anticipated tax benefits.(fn9) (However, gifting will remove future appreciation-that is, post-gift appreciation-from the donor's taxable estate.)
Nevertheless, with all the uncertainty and anxiety, many clients still may make large gifts this calendar year.(fn10) There could be a record number of gift tax return filings reporting these gifts.
The Federal Gift Tax and its Intended Broad Scope
Congress imposed the federal gift tax on a "transfer of property by gift."(fn11) Gift tax applies to all gratuitous property transfers, whether the transfer is direct or indirect. In explaining its intent, Congress instructed that:
The terms "property," "transfer," "gift," and "indirectly" are used in the broadest and most comprehensive sense; the term "property" reaching every species of right or interest protected by law and having an exchangeable value.
The words "transfer . . . by gift" and "whether . . . direct or indirect" are designed to cover and comprehend all transactions . . . whereby, and to the extent . . . that, property or a property right is donatively passed to or conferred upon another, regardless of the means or the device employed in its accomplishment.(fn12)
Even with this broad intent, Congress created exceptions. For public policy reasons, nontaxable gifts include direct tuition payments to a qualifying educational organization (but not fees for books, supplies, or room and board)(fn13) and qualifying medical remittances (for the prevention or alleviation of a physical or mental defect or illness).(fn14) For administrative convenience reasons, Congress created an annual exclusion (to an unlimited number of persons) available for smaller-value present interest gifts (including wedding and birthday gifts) that do not exceed $13,000.(fn15)
Making a Gift
Making a gift is simple. With respect to cash, check, or wire transfer gifts, the donor simply removes funds from his or her financial account and places them in the donee's account.(fn16) Marketable securities are gifted in much the same way. Equity or debt securities are transferred or "retitled" into the donee's brokerage account.
Transfers of closely held business interests are much more problematic.(fn17) Interests in partnerships and limited liability companies typically are transferred by a document labeled an "assignment." For the gift to be effective, the assignment transfer must comply with the terms and conditions of the entity's governing documents.(fn18)
The interest transferred also must be valued. For gift tax purposes, the valuation standard is fair market value. This is the price a willing buyer would pay a willing seller where neither is under a compulsion to buy or sell and both have a reasonable knowledge of the relevant...
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