GIFT TAX

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Why it pays to understand the federal gift tax law
If you give people a lot of money or property, you might have to pay a federal gift tax. But most gifts are not subject to the gift tax. For instance, you can give up to the annual exclusion amount ($13,000 in 2012) to any number of people every year, without facing any gift taxes. Recipients never owe income tax on the gifts. In addition to the annual gift amount, your can give a total of up to $5.12 million starting in 2012 in your lifetime before you start owing the gift tax. If you give $15,000 each to ten people in 2012, for example, you'd use up $20,000 of your $5.12 million lifetime taxfree limit—ten times the $2,000 by which your $15,000 gifts exceed the $13,000 perperson annual gift-free amount for 2012.
The law completely ignores gifts of up to $13,000 per person, per year, that you give to any number of individuals. (You and your spouse together can give up to $26,000 per person, per year to any number of individuals.

The interplay between the gift tax and the Estate Tax
Your estate is the total value of all of your assets, less any debts, at the time you die. The new rules for 2012 will tax estates over $5.12 million at rates as high as 35%. That $5.12 million is an exclusion meaning the first $5.12 million of your estate does not get taxed. These estate tax provisions were enacted in December 2010, are temporary, and are scheduled to expire after 2012. So why not give all of your property to your heirs before you die and avoid any estate tax that might apply? Clever, but the government is ahead of you. As noted above, you can move a lot of money out of your estate using the annual gift tax exclusion. Go beyond that, though, and you begin to eat into the exclusion that offsets the bill on the first $5.12 million of lifetime gifts. Go beyond the $5.12 million and you'll have to pay the gift tax—at rates that mirror the individual income tax, up to 35% in 2012.

The basic tax basis issue

As you consider making gifts, keep in mind that very different rules determine the tax basis of property someone receives by gift versus receives by inheritance. For example, if your son inherits your property, his tax basis would be the fair market value of the property on the date you die. That means all appreciation during your lifetime becomes tax-free. However, if he receives the property as a gift from you, his tax basis is whatever your tax basis was. That means he'll owe tax on appreciation during your life, just like you would have if you sold the asset yourself. The rule that "steps up" basis to date of death value for inherited assets saves heirs billions of dollars every year. A tax basis example
Your mother has a house with a tax basis of $60,000. The fair market value of the house is now $300,000. If your mother gives you the house as a gift, your tax basis would be $60,000. If you inherited the house after your mother's death in 2012, the tax basis would be $300,000, its fair market value on the date of her death. What difference does this make? If you sell the house for $310,000 shortly after you got it:

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Your gain on the sale is $250,000 ($310,000 minus $60,000) if you got the house as a gift. Your gain on the sale is $10,000 ($310,000 minus $300,000) if you got the house as an inheritance.

What is a gift?
For tax purposes, a gift is a transfer of property for less than its full value. In other words, if you aren't paid back, at least not fully, it's a gift. In 2012, you can give a lifetime total of $5.12 million in taxable gifts (that exceed the annual tax-free limit) without triggering the gift tax. Beyond the $5.12 million level, you would actually have to pay the gift tax.

Gifts not subject to the gift tax
Here are some gifts that are not considered "taxable gifts" and, therefore, do not count as part of your $5.12 million lifetime total. Present-interest gift of $13,000 in 2012. "Present-interest" means that the person receiving the gift has an unrestricted right to use or enjoy the gift immediately. In 2012 you could give amounts up to $13,000 to each person, gifting as many different people as you want, without triggering the gift tax.



Charitable gifts

Gifts to a spouse who is a U.S. citizen. Gifts to foreign spouses are subject to an annual limit of $139,000 in 2012. This amount is indexed for inflation and can change each year. Gifts for educational expenses. To qualify for the unlimited exclusion for qualified education expenses, you must make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify. If you want to pay for books, supplies and living expenses in addition to the unlimited education exclusion, you can make a 2012 gift of $13,000 to the student under the annual gift exclusion. Example: In 2012, an uncle who wants to help his nephew attend medical school sends the school $15,000 for a year's tuition. He also sends his nephew $13,000 for books, supplies and other expenses. Neither payment is reportable for gift tax purposes. If the uncle had sent the nephew $28,000 and the nephew had paid the school, the uncle would have made a reportable (but maybe not taxable) gift in the amount of $15,000 ($28,000 less the annual exclusion of $13,000) which would have reduced his $5.12 million lifetime exclusion by $15,000. The gift tax is only due when the entire $5.12 million lifetime gift tax amount has been surpassed. Payments to 529 state tuition plans are gifts, so you can exclude up to the annual $13,000 amount. In fact, you can give up to $65,000 in one year, using up five year's worth of the exclusion, if you agree not to make another gift to the same person in the following four years. Example: A grandmother contributes $65,000 to a qualified state tuition program for her grandchild in 2012. She decides to have this donation qualify for the annual gift exclusion for the next five years, and thus avoids using a portion of her $5.12 million gift tax exemption. Gifts of medical expenses. Medical payments must be paid directly to the person providing the care in order to qualify for the unlimited exclusion. Qualifying medical expenses include: o Diagnosis and treatment of disease

o o o

Procedures affecting a structure or function of the body Transportation primarily for medical care Medical insurance, including long-term care insurance In addition to these gifts that are not taxable, there are some transactions that are not considered gifts and, therefore, are definitely not taxable gifts. Adding a joint tenant to a bank or brokerage account or to a U.S. Savings Bond. This is not considered to be a gift until the new joint tenant withdraws funds. On the other hand, if you purchased a security in the names of the joint owners, rather than holding it in street name by the brokerage firm, the transaction would count as a gift. Making a bona fide business transaction. Even if you later find out that you paid more than the item was worth based on its fair market value, the transaction is not a gift; just a bad business decision.

Gifts subject to the gift tax

The following gifts are considered to be taxable gifts when they exceed the annual gift exclusion amount of $13,000 in 2012. Remember, taxable gifts count as part of the $5.12 million in 2012 you are allowed to give away during your lifetime, before you must pay the gift tax.







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Checks. The gift of a check is effective on the date the donor gives the check to the recipient. The donor must still be alive when the donor's bank pays the check. This rule prevents people from making "deathbed gifts" to avoid estate taxes. Adding a joint tenant to real estate. This transaction becomes a taxable gift if the new joint tenant has the right under state law to sever his interest in the joint tenancy and receive half of the property. Note that the recipient only needs to have the right to do so for the transaction to be considered a gift. Loaning $10,000 or more at less than the market rate of interest. The value of the gift is based on the difference between the interest rate charged and the applicable federal rate. Applicable federal rates are revised monthly. This rule does not apply to loans of $10,000 or less. Canceling indebtedness Making a payment owed by someone else. This is a gift to the debtor. Making a gift as an individual to a corporation. Such a donation is considered to be a gift to the individual shareholders of the corporation unless there is a valid business reason for the gift. Such a donation is not a present-interest gift, and thus does not qualify for the annual per person per year exclusion.

Example: A son owns a corporation worth $100,000. His father wants to help his son and gives the corporation $1 million in exchange for a 1 percent interest in the company. This is a taxable gift from father to son in the amount of $1 million less the value of one percent of the company.





A gift of foreign real estate from a U.S. citizen. For example, if a U.S. citizen gives 100 acres he owns in Mexico to someone (whether or not the recipient is a U.S. citizen), it is subject to the gift tax rules if the land is worth more than $13,000. Giving real or tangible property located in the United States. This is subject to the gift tax rules, even if the donor and the recipient are not U.S. citizens or residents. Nonresident aliens who give real or tangible property located in the United States are allowed the $13,000 annual present-interest gift exclusion and unlimited marital deduction to U.S. citizen spouses, but are not allowed the $5.12 million lifetime gift tax exemption.

How gifts to minors are taxed
If you give an amount up to $13,000 to each child each year, your gifts do not count toward the $5.12 million of gifts you are allowed to give in a lifetime before triggering the gift tax. But what counts as a gift to a minor?

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Gifts made outright to the minor Gifts made through a custodial account such as that under the Uniform Gifts to Minors Act (UGMA), the Revised Uniform Gifts to Minors Act, or the Uniform Transfers to Minors Act (UTMA) Note: One disadvantage of using custodial accounts is that the minor must receive the funds at maturity, as defined by state law (generally age 18 or 21), regardless of your wishes. A parent's support payments for a minor are not gifts if they are required as part of a legal obligation. They can be considered a gift if the payments are not legally required. Example: A father pays for the living expenses of his adult daughter who is living in New York City trying to start a new career. These payments are considered a taxable gift if they exceed $13,000 during 2012. However, if his daughter were 17, the support payments would be considered part of his legal obligation to support her and, therefore, would not be considered gifts.

How to report and pay the gift tax
If you make a taxable gift, you must file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return, which is due April 15 of the following year. Even if you do not owe a gift tax because you have not reached the $5 million limit, you are still required to file this form if you made a gift that exceeds the $13,000 annual gift tax exclusion level. The IRS needs to keep a running tab of your lifetime exemption.
Example 1

In 2012, you give your son $14,000 to help him afford the down payment on his first house. This is a gift, not a loan. You must file a gift tax return and report that you used $1,000 ($14,000 minus the $13,000 annual exclusion) of your $5.12 million lifetime exemption.
Example 2

Same facts as above, except that you give your son $12,000 and your daughter-in-law $2,000 to help with the down payment on a house. Both gifts qualify for the annual exclusion. You do not need to file a gift tax return.
Example 3

Same facts in Example 1, but your spouse agrees to "split" the gift—basically this means he or she agrees to let you use part of his or her exclusion for the year. A husband, for example, could give $26,000 to his son without triggering the gift tax if his wife agrees not to give the son any gift that year. Although no tax is due in this situation, the husband would be required to file a gift tax return indicating that the wife had agreed to split the gift.

Forms, publications and tax returns
Only individuals file Form 709: U. S. Gift (and Generation-Skipping Transfer) Tax Return—there's no joint gift tax form. If a husband and a wife each make a taxable gift, each spouse has to file a Form 709.

On a gift tax return you report the fair market value of the gift on the date of the transfer, your tax basis (as donor) and the identity of the recipient. You should attach supplemental documents that support the valuation of the gift, such as financial statements in the case of a gift of stock in a closely-held corporation or appraisals for real estate. If you sell property or family heirlooms to your child for full fair market value, you don't have to file a gift tax return. But you may want to file one anyway to cover yourself in case the IRS later claims that the property was undervalued, and that the transaction was really a partial gift. Filing Form 709 begins the three-year statute of limitations for examination of the return. If you do not file a gift tax return, the IRS could question the valuation of the property at any time in the future.

TAXABLE GIFTS OF GINGER

GIFT SPLITTING

( GIVEN BY GREG ) (80,000/2 - 13,000)

$ 27,000 NIL

WILL FROM GRANDMOTHER BEQUEATHED GIFT TO STATE UNIVERSITY ($ 1,00,000 -$13,000)

$ 87,000 $ 9,000 $ 30,000 $ 2,87,000 $ 8,252 = $ 4,48,252 $ 1,75,000 = $ 6,23,252

PMT OF INSURANCE BEQUEATHED TO DENISE ($ 22,000 -$13,000) JOINT TENANCY RIGHT TRANSFER TO IRREVOCABLE TRUST ($ 3,00,000 -$13,000) REMAINDER INTEREST GIFTED ($ 21,252 -$13,000) TOTAL TAXABLE GIFTS IN EXCESS OF THE BASIS LIMIT GINGERS EARLIER TAXABLE GIFTS TOTAL TAXABLE GIFTS IN 2012 IN 1996

IN THIS CASE GINGER IS NOT LIABLE TO PAY ANY TAX IN THE YEAR 2012 because SHE HAS NOT REACHED the $5.12 million limit, she still will be required to file this Form 709 because the gifts made are in excess of the annual gift tax exclusion level. The IRS needs to keep a running tab of your lifetime exemption.

Estate Taxes If your death occurs during a year when the federal estate tax is in effect, then whether your estate will be liable for federal estate taxes will depend on the value of your gross estate, the amount of debt you owe at the time of your death, the total expenses that will be incurred while settling your estate, and any deductions that your estate can take. Here is how to figure out an estimate of your estate tax liability. Determine the Value of Your Net Estate The value of your gross estate is what is used as the starting point for determining your estate tax liability. Learn how to calculate an estimate of the value of your gross estate by reading: When calculating the value of a gross estate for federal estate tax purposes, there are two different values that can be used: the "date of death" value and the "alternate valuation date” value. Using the Date of Death Value The date of the death value is the fair market value of the asset valued on the decedent’s actual date of death:


Bank, investment and retirement accounts - The statement values on the date of death are used.



Publicly traded stocks held outside of a brokerage account - The average of the high and low prices on the date of death multiplied by the number of shares the decedent owned is used. Note: If the death occurs on a day when the stock market is closed, then the average prices for the stock on the trading days immediately before and after the date of death are used.



Personal effects, business interests and real estate - The appraised fair market value on the date of death is used.

Using the Alternate Valuation Date The alternate valuation date value is the fair market value of the all of assets included in the decedent’s gross estate six months after the date of death. Under the Internal Revenue Code, the Personal Representative is allowed to choose whether to use the date of death values or the alternate valuation date values. Why would the Personal Representative choose the alternate valuation date values instead of the date of death values? Because if one or more of the estate assets have lost a significant amount of value during the six months after death, then the estate tax bill can be reduced. If the alternate valuation date values are used, however, then all of the assets must be revalued, not just ones that have gone down in value. And what happens if an asset is sold during the six months after the date of death? Then the sales price of the asset must be used. The big downside to using the alternate valuation date values is that the step up in basis that the beneficiaries will receive will be locked in at the lower alternate values. If you want to calculate your estate tax liability, you'll first need to calculate the value of your gross estate. Here's how. Assets Included in Your Gross Estate The assets that will be included in your gross estate for estate tax purposes are as follows:


Bank Accounts - Including checking, savings, money markets and CDs. If the account is in your sole name (including payable on death accounts) or in your Revocable Living Trust, the entire value is included; if the account is in joint names with your spouse with rights of survivorship, only 50% of the value is included; if the account is in joint names with someone other than your spouse with rights of survivorship, 100% of the value is included unless it can be proven that the other account owners made contributions to the account; if the account is in joint names as tenants in common, only your proportionate interest is included.



Investment Accounts - Including brokerage accounts and mutual funds. If the account is in your sole name (including payable on death accounts) or in your Revocable Living Trust, the entire value is included; if the account is in joint names with your spouse with rights of survivorship, only 50% of the value is included; if the account is in joint names with someone other than your spouse with rights of survivorship, 100% of the value is included unless it can be proven

that the other account owners made contributions to the account; if the property is in joint names as tenants in common, only your proportionate interest is included.



Stocks and Bonds Held in Certificate Form - If the stock or bond is in your sole name or in your Revocable Living Trust, the entire value is included; if the stock or bond is in joint names with your spouse with rights of survivorship, only 50% of the value is included; if the stock or bond is in joint names with someone other than your spouse with rights of survivorship, 100% of the value is included unless it can be proven that the other account owners helped to purchase the stock or bond; if the stock or bond is in joint names as tenants in common, only your proportionate interest is included.



U.S. Savings Bonds - If the bond is in your sole name (including payable on death bonds) or in your Revocable Living Trust, the entire value is included; if the bond is in joint names with your spouse with rights of survivorship, only 50% of the value is included; if the bond is in joint names with someone other than your spouse with rights of survivorship, 100% of the value is included unless it can be proven that the other account owners helped to purchase the bond; if the bond is in joint names as tenants in common, only your proportionate interest is included.  Personal Effects - Including furniture and furnishings; clothing; jewelry; antiques; collectibles; art work; books; guns; computers; TVs and the like.



Automobiles, Boats, and Airplanes - If the vehicle is in your sole name or in your Revocable Living Trust, the entire value is included; if the vehicle is in joint names with your spouse, only 50% of the value is included; if the vehicle is in joint names with someone other than your spouse, 100% of the value is included unless it can be proven that the other account owners helped to purchase the vehicle.



Monies Owed to You - This includes mortgages held by you, personal loans you've made, and wages, bonuses, commissions and royalties owed to you at the time of your death.



Life Insurance - If you own the policy on your own life, 100% of the proceeds are included; if you own the policy on someone else's life, only the cash value is included.



Retirement Accounts - This category includes Roth and Traditional IRAs; Simple and SEP IRAs; 401(k)s; 403(b)s and annuities; 100% of the value is included.



Closely Held Business Interests - This category includes sole proprietorships, partnerships, limited liability companies and stock held in closely held corporations. The value of your ownership interest is included.



Real Estate - If the property is in your sole name or in your Revocable Living Trust, the entire value is included; if the property is in joint names with your spouse with rights of survivorship, only 50% of the value is included; if the property is in joint names with someone other than your spouse with rights of survivorship, 100% of the value is included unless it can be proven that the other property owners helped to purchase the property; if the property is in joint names as tenants in common, only your proportionate interest is included.



Certain Trust Assets - Certain trusts of which you are a beneficiary, including any trust over which you have a "general power of appointment," will be included in your gross estate at the full value of the trust property. This includes the full value of an "A Trust" established for your benefit as a surviving spouse using true "AB Trust" planning.



Taxable Lifetime Gifts - These are gifts that you made in excess of the annual gift tax exclusion amount in the year in which you made the gift. The exclusion amount used to be $10,000 per gift and is currently $12,000 but will go up to $13,000 in 2009.



Certain Transfers Made Within 3 Years of Death - This includes life insurance owned by you and transferred into an Irrevocable Life Insurance Trust within 3 years of your date of death.

From your gross estate the following can then be subtracted to give you the value of your net estate for estate tax purposes: 1. Debts and expenses, including mortgages, lines of credit, personal loans, credit card debt, funeral expenses and medical bills; as well as administrative expenses to settle your estate or Revocable Living Trust, including attorney, accounting and appraisal fees, storage and shipping fees, insurances, and court fees; (Tip: To get a rough estimate of the administrative expenses, multiply your gross estate by 5%);

2. Charitable transfers, including direct gifts and property set aside in a Charitable Remainder Trust or Charitable Lead Trust; and

3. Transfers to a spouse who is a U.S. citizen, including outright transfers by right of survivorship and transfers made to a trust that qualifies for the unlimited marital deduction, such as the "A Trust" established when using AB Trust planning or ABC Trust planning. Determine Your Federal Estate Tax Liability From your net estate is then subtracted your available federal estate tax exemption to arrive at your taxable estate. The federal estate tax exemption for the 2010 and 2011 tax years was $5,000,000 and the exemption for the 2012 tax year is $5,120,000.

Some Examples Here are some examples that should help you to understand how an estate tax bill is calculated: 1. Death in 2012, no lifetime gifts, taxable estate - If you die in 2012 and your gross estate is $6,000,000 and your allowable debts, expenses and deductions are $500,000, then your net estate is $5,500,000. You then subtract from your net estate your available estate tax exemption to arrive at your taxable estate. If you haven't made any taxable gifts during your lifetime, then in this example your taxable estate will equal $380,000: $5,500,000 net estate - $5,120,000 estate tax exemption = $380,000 taxable

estate Your taxable estate is then multiplied by 35% to arrive at your federal estate tax liability, which in this example equals $133,000: $380,000 taxable estate x 35% rate = $133,000 tax liability

2. Death in 2012, no lifetime gifts, nontaxable estate - Use the same facts above, except that your net estate is valued at $4,000,000. In this case, since your net estate is less than the 2012 estate tax exemption, your taxable estate will be $0 and so your tax liability will be $0: $4,000,000 net estate - $5,120,000 estate tax exemption = $0 taxable estate

3. Death in 2012, $1,000,000 in lifetime gifts - Use the same facts above, except that your death occurs in 2012 and you made $1,000,000 of taxable gifts during your lifetime. This means that the $1,000,000 in taxable lifetime gifts will be subtracted from your available estate tax exemption, leaving you with a $4,120,000 exemption: $5,120,000 exemption - $1,000,000 lifetime gifts = $4,120,000 exemption Thus, your estate tax liability will be $0: $4,000,000 net estate - $4,120,000 available exemption = $0 taxable estate

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