December is a great month for giving and receiving. Fasten your safety belts for this speedy, bullet- point review of the most important gift tax rules:
• There has been no Wisconsin gift tax since De- cember 31, 1991.
• Federally in 2011 and 2012 there is an annual exclusion of $13,000 for each gift recipient. This means Dad can give each of his 10 grandchildren and each of his neighbors $13,000 per year. Mom can also give each of these people (and more) $13,000 per year.
• If more than $13,000 is given to any one per- son in a calendar year, the excess over $13,000 re- duces the giver’s lifetime exemption of $5 million by the amount of the excess over $13,000.• The gift and estate tax exemptions are both $5 million in 2011 and 2012. However, to the extent you use your lifetime gift exemption, you reduce your estate tax exemption. Both gift and estate tax rates are 35% once you use up your lifetime exemptions.
• All gifts to a spouse are exempt.
• Educational and medical bills paid directly to the college or medical provider are completely exempt regardless of size. Gifts for medical care include medical insurance.
• If Grandpa gifts to his grandson’s college savings plan and wants to gift more than $13,000 right away, he can gift $65,000 to that qualified savings plan and treat it as 5 annual gifts of $13,000 per year. Grandma can do the same, for a total gift to grand- son’s college savings plan of $130,000 that year. Note: No further gift could be given to that grandson by either grandparent during the ensuing 5 year period without exceeding the $13,000 annual exclusion limit.
• The recipient of a gift takes the giver’s tax basis in the gifted asset. When that asset is later sold, the taxable capital gain will be the difference between the net sales price and the giver’s original basis. Under current law, if that asset had been transferred after the giver’s death, the basis would have been “stepped up” or increased to equal the value on the giver’s date of death. All taxable capital gain accumulated during the giver’s ownership would then be eliminated. Lesson: do not gift highly appreciated
property. Wait to transfer that property until death. Gift cash during your lifetime.
• A person with dementia can still use his/her $13,000 annual exclusion to each recipient if the giver has included in his/her durable financial power of attorney a power to make such gifts. Lesson: Make cer- tain your financial power of attorney document gives your agent a durable gifting authority.
Gifted property is not income taxable to the recipient, but any income generated by the gifted property is income taxable. To avoid income tax on a “gift”, it must result from “detached and disinterested generosity.” Les- son: Oprah’s car “gifts” were taxable income to the lucky recipients because Oprah received advertising and marketing benefit to her T.V. show through the valuable prizes she gave away.
• If Congress does not extend the gift and estate tax $5 million exemptions by December 31, 2012, the pre-2002 $1 million exemption and 55% tax rate will again be effective. Because Congress includes many people (both Democrats and Republicans) with estates far in excess of $1 million, it seems likely that gift and estate tax lifetime exemptions of $5 million or more will be extended.
If you have gift or estate tax questions, we would like to help you answer them.
John A. Stocking