Howdy,
Well, step dad passed on the Eve but it's a blessing as his heart and kidneys were shutting down and he wasn't eating. They had sent him home with hospice assistance.
Anyway, the estate is under the Fed estate exclusion and it's all cash in a joint acct with me. Everything. This means that I can avoid probate and any of that misery, but still am concerned about the IRS. Ge and my mom had been giving the annual max to the 6 heirs for years including 2011. However, the remaining estate distribution will be around $40K.
How can I get around the annual gift limit legally? Can I just cut checks and mail them out? I know that I can split the gift, to let's say, an heir and their spouse and give $26K, but two of the heirs are currently single. I'd sure hate to have to wait two bloody years to close it out. Also, should I exceed the limits, the taxes should come out of his estate as the gifter is the person paying, not the giftee. feh.
Any thoughts?
peace,
rono
Comments
I extend my condolence to you and yours upon the passing of your step dad. My father passed a bit more than 3 years ago; with his illness being very short, which, thankfully limited his discomfort.
I am not able to provide ready assistance regarding the gifting; although I am aware of this part of the tax code. I am sure others here will be able to lend guiding thoughts about this situation.
Sincerely,
Catch/Mark
I'm sorry to hear about your step dad. At least it was not completely unexpected.
Regarding the distribution of assets: first make sure that you really do have the money. There are different forms of joint ownership, and right of survivorship isn't always automatic just because the property is held jointly. Aside from the "well known" rule that tenants in common property doesn't go to the survivor, there can also be situations and states where even property held as joint tenants doesn't go to the survivor. This I know from personal experience because I was faced with this situation - a bank account titled joint tenancy, but without explicitly stating "with right of survivorship"; I got a letter from the state saying that according to state law the property did not pass to the survivor. (I filed as voluntary administrator to deal with that half of the account.) Never take anything for granted.
Assume that you do have the money (this should be easy to verify - just provide the financial institution the death certificate and any other docs they want, and they should retitle the account in your name alone). You and spouse (assuming you have a spouse) can each gift $13K to each "heir", this year (2011) and next (2012) to reach the $40K target. Other than playing simple head count games like that (or the converse that you already mentioned - gifting to "heir" and "heir's" spouse), I don't know of other mechanisms to avoid the gift tax beyond spreading the gift out over more time.
I don't believe that gifting to an irrevocable trust (with "heir" as beneficiary) would help; a quick look around suggests that this would be treated by the IRS as a gift to the beneficiary of the trust (so you couldn't manufacture more recipients this way - you'd just be gifting more to each "heir").
So long as your total lifetime gifts (not counting the sub-$13K gifts you make) are under the estate tax exclusion (currently $5M federal), there is no gift tax due. The effect of gifting more than $13K to someone is that the excess (amount over $13K) is subtracted from the $5M you're allowed to pass without estate tax when you die. (Should that estate tax exemption drop back down to, say, $1M, then the amount you've gifted gets subtracted from $1M.) Again, this is not a tax you pay now.
I'm not sure what you mean by "the stepdad's estate should pay the tax" - by your own statement, there is no money in that estate - it is all yours (by right of survivorship). So it would seem that if there were a gift tax to be paid, you should pay it, since you're the new owner of all stepdad's money. Gift tax is always a liability of the gifter (well, usually the gifter's estate), not the recipient. Some states have inheritance taxes (taxes on the recipients); that's not the way federal estate/gift taxes work (the executor is responsible for the estate tax).
Finally, despite what the trust industry would have you believe, probate is in many states quite quick and nearly painless. Now the paperwork after that is another matter (e.g. providing estate inventory for the estate, dealing with 706 estate tax return, 1041 estate income tax return, etc.).
As always, I need to be clear that I'm not a lawyer, that this is not intended as legal advice but as information only, that I may have no idea what I'm talking about, and that at best this paints only a partial picture that may not apply to your particular situation.
Like msf, I'm not a tax professional but my wife had a joint account with her dad. When he passed she closed that account and put the proceeds in ours. Our CPA said because it was a joint account there was no reporting or tax implications.
Thanks all for the help.
Update: The lifetime gross estate exemption is $5M. So long as the estate doesn't exceed that, it's a straight up deal and annual gifting limits don't apply. In our case, we're avoiding probate via previous liquidation of all real property and conversion of assets to cash held jointly with me (Executor and DPOA). It wasn't such a large estate as to require other handling.
Cleared most everything today, but plan to wait on closing this acct until next 12/31/2012. In this way I can continue to cover any hanging chad bills that come in and what not. At the end of the year, I'll close it down and distributed the residuals. This will allow me to distribute 97% of the estate immediately. Keeping this acct open will help with my closing down things with the IRS. I've done their taxes for several years now but they'll still be harder than SS and Medicare. Hell, the funeral home notified them and they are OK. You know, I've found that the Social Security Admin is one of the most user friendly gov't offices I've ever had to deal with.
So far, things are going well.
peace,
rono
Regarding estate taxes (and gift taxes). It appears there were (or will be) a total of two transfers. One is the transfer from step dad to you via JWROS account. Except for spouses, the IRS presumes (for estate tax purposes) that the entire amount of a joint account is in the gross estate of the deceased (that's the amount subject to estate tax). [FWIW, it's a rebuttable presumption.] Since this was under $5M in 2011, it escapes estate tax, as you described.
The other transfer is from you (it is now your money) to your recipients. Again, because the amount is under $5M, it escapes gift tax. But that just means that you don't presently pay any taxes on the gift transfer. As I (tried to) explain above, the gift is nevertheless added to your gross estate upon your demise. Many commentators believe that if the estate tax exemption amount is less (than the current $5M) in the year of your death, that this gift could ultimately be subject to estate tax.
For example, suppose you're distributing $2M now, and you die with $1M in assets. Suppose that the year that you die, the estate tax exemption amount has dropped back to $1M (which will happen if Congress does nothing and you survive 2012). Then your taxable estate would be valued at $3M ($2M from the gift, plus $1M from your assets). After subtracting the $1M exemption amount, $2M would be subject to estate tax. In other words, the gift can put your estate over the limit, and get taxed via the estate tax.
The WSJ calls this possibility a claw back. The AICPA explains the rules and how they play out with example calculations. It ultimately calls the effect a "recapture", because all that is happening is that the IRS is recapturing at your demise the gift tax that you will escape paying this year. The text is complex; the examples are quite clear, given the complexity of the situation.
Thanks for your response. The Will will be shared with the heirs which have known for years that I was named in it as Executor. It's a 6 way split w/o issues. If any of them want a probate judge to name me as Executor, fine. Wait for your cheese.
I'm in contact and we all get along. The nut is - according to my parents, avoid probate, outside bs and distribute things equally 6 ways ASAP. In this way I'll have 97% distributed this week with the remaining 3% a year from now.
peace,
rono