Death and Taxes - The Blog

Year-End Gifting Made Easy (2006-2007 Edition)

According to the IRS, the annual gift tax exclusion will stay at $12,000 for 2007.  The gift tax exclusion is the amount that you can give to as many people as you wish, per year, without paying gift tax or even needing to file a gift tax return. 

If you are in a situation where you'd like to make gifts, the end of the year (and the start of the next year) is a good time to do it. Three quick, easy scenarios:

1. You and your spouse have three grown children.  (Each child is married and has one child of his or her own.)  You and your spouse each give $12,000 to each child on December 31, 2006 and $12,000 to each child on January 1, 2007.  You have just given away $144,000 without having to pay gift tax or even file a return.

2. Same facts as in 1., but you also make the same gifts to each child's spouse.  That's another $144,000 that you've given away without having to pay gift tax or even file a return.

3. Same facts as in 2., but you also make the same gifts to your three grandchildren.  That's another $144,000 that you've given away without having to pay gift tax or even file a return.

If you are in a situation where you'd like to make gifts, the end of the year (and the start of the next year) is a good time to do it. Three quick, easy scenarios:

1. You and your spouse have three grown children.  (Each child is married and has one child of his or her own.)  You and your spouse each give $12,000 to each child on December 31, 2006 and $12,000 to each child on January 1, 2007.  You have just given away $144,000 without having to pay gift tax or even file a return.

2. Same facts as in 1., but you also make the same gifts to each child's spouse.  That's another $144,000 that you've given away without having to pay gift tax or even file a return.

3. Same facts as in 2., but you also make the same gifts to your three grandchildren.  That's another $144,000 that you've given away without having to pay gift tax or even file a return.

Joint Accounts, Convenience Accounts and Donative Intent

Many older people add another person (usually a child) as a joint tenant on their bank account.  The question when the older person dies is, did he or she have "donative intent" with respect to the account?  Put another way,...

1. Did the older person intend to make a gift of the account to the other owner upon the older person's death?

OR

2. Was the other owner simply listed as an owner for convenience (maybe it was easier for the other person to write out checks, make deposits, etc.)?

The recent case of In re Estate of Shea (from Illinois' Second District Court of Appeals) includes a lot of nice language talking about how to deal with the above issue.  I've tried to cobble this language into different statements to (hopefully) create an easy 3-step process for addressing the disposition of joint accounts.

Step 1: The Presumption of a Gift (Burden of Proof #1)

As the parties agree, when a sole owner of a bank account adds an apparent joint tenant to the account, the law presumes that the original owner intends a gift.... [T]he relevant presumption is that the joint account agreement alone governs the ownership of a joint account, i.e., speaks the whole truth.

Step 2: Overcoming the Presumption of a Gift - Convenience Accounts

A party challenging the presumption can overcome it only by clear and convincing evidence.... [C]lear and convincing evidence that the joint tenants had any understanding other than that in the joint account agreement can defeat the presumption that the joint account agreement speaks the whole truth.

Illinois authority treats evidence establishing that a joint account was used as a convenience account as overcoming the presumption of a gift....   A convenience account is an account that is nominally a joint account, but is intended to allow the nominal joint tenant to make transactions only as specified by, and on behalf of, the account's creator....  The typical purpose of such an account is to allow the nominal joint tenant to pay the true owner's bills while the true owner is unable to do so.  These cases reasonably assume that a person does not intend to give away the funds in the very account he or she relies on to pay bills.

Step 3: Burden of Proof #2

[O]nce the party challenging the ownership of the bank account has presented sufficient evidence to overcome the presumption of a gift, the presumption vanishes.... However, the burden of proof remains on the party challenging the ownership.... [That is, o]n meeting that first burden, [the challenging party] has the second burden of showing by the preponderance of the evidence that the estate is entitled to the accounts. 

Follow-up #1: Gifting a Home

Last week I shared a true story about a tax-related cost of gifting your residence.  The author of one of my favorite law blogs, Deirdre R. Wheatley-Liss, also posted on this topic recently, and fleshed out why gifting can be such a bad idea.  Her post is here.

Another Reason Not To Gift Residence

There are a lot of reasons NOT to give away your residence during your lifetime.  Many of those reasons have to do with relationship issues -- if you give your house to your son and then have a fight with him, will he kick you out? -- but tax concerns also play a part.  Here's a situation involving an acquaintance of mine -- the names and some details have been changed, but the main facts are accurate:

Joe Smith buys a house on the north side of Chicago in 1950 for $45,000.  In 2000, Mr. Smith makes a gift of the house to his only child, Marge, who lives there with (and cares for) him.  In 2005, Mr. Smith dies -- the house is appraised at $1.3 million. 

If Mr. Smith had owned the house at his death, Marge would have inherited it with a ("stepped-up") basis equal to the house's value at his death.  Marge then could have sold the house and paid no capital gains.  However, when Mr. Smith gifted the house to Marge, Marge assumed Mr. Smith's basis in the house -- let's say that's $45,000 (although improvements to the house may have increased that number a bit).  If Marge now wants to sell the house, she'll have a gain of around $1.2 million.  Some ($250,000) of that gain is excluded from taxation, but Marge will still have to pay tax on almost $1 million of gain.

One final point: gifting the house might have made more sense (at least from a tax perspective) if Mr. Smith had a bigger estate, since the estate tax rates are higher than the capital gains rates.  Excluding $1.3 million from your estate may be a good idea.  However, Mr. Smith had very few assets other than the house -- about $100,000 -- so his estate wasn't subject to estate tax at all.

Florida: Enabling Bad Estate Planning

I've written quite a bit about why it's a bad idea to give someone the gift of making them a joint tenant on your property -- here is my main post on the subject, which references an article from my website as well as an article from the You and Yours Blawg.

I'm sure Florida's politicians have the best of intentions, but the legislation discussed here is nonsensical.  The legislation "would keep a cap on property tax increases when a co-owner is added to a homestead property deed," an issue that "comes up most often when a parent puts a child's name on a deed to try to avoid probate court when the parent dies."  Adding a child or other individual as a joint tenant on your home is almost always a bad idea, and isn't something that the state should be encouraging or enabling.  The article mentions that  the legislation would cost the state $8.6 million per year in lost revenue.  The problem is that it's going to cost the people of the state of Florida much more than that when you consider the disputes that inevitably arise from these types of situations. 

Year-End Gifting Made Easy

Next year the annual gift tax exclusion will increase from $11,000 to $12,000.  The gift tax exclusion is the amount that you can give to as many people as you wish, per year, without paying gift tax or even needing to file a gift tax return. 

If you are in a situation where you'd like to make gifts, the end of the year (and the start of the next year) is a good time to do it.  Three quick, easy scenarios:

1. You and your spouse have three grown children.  (Each child is married and has one child of his or her own.)  You and your spouse each give $11,000 to each child on December 31, 2005 and $12,000 to each child on January 1, 2006.  You have just given away $138,000 without having to pay gift tax or even file a return.

2. Same facts as in 1., but you also make the same gifts to each child's spouse.  That's another $138,000 that you've given away without having to pay gift tax or even file a return.

3. Same facts as in 2., but you also make the same gifts to your three grandchildren.  That's another $138,000 that you've given away without having to pay gift tax or even file a return.

Gifting to your Attorney

Law.com has an interesting story (here) about Alice Lawrence's lawsuit against the law firm of Graubard Miller.  Part of Ms. Lawrence's suit relates to the payment of legal fees to the firm for a probate litigation case involving her husband's estate, but there are also these allegations:

Ms. Lawrence wrote personal checks to the three Graubard Miller partners. [C. Daniel] Chill received $2 million. [Elaine M.] Reich received $1.55 million and [Steven] Mallis received $1.5 million.

According to the suit, they specifically told her not to pay this money to the firm, but to each of them individually. Chill allegedly instructed her to denote the payment as a "gift" on each check's memo line.

The following April, Chill allegedly told Ms. Lawrence she would need to pay gift taxes on the bonuses to the three partners or else their bonus payments would be dramatically reduced. She then paid $2.7 million in gift taxes to the federal government.

Maybe I'm missing something, but I can't think of a situation in which making substantial taxable gifts to your attorneys -- on the advice of those same attorneys -- is appropriate.

www.taxalmanac.org

Yesterday Professor Beyer ran this note about www.taxalmanac.org, a new website for tax professionals created by the software maker Intuit (they are the TurboTax people).  By coincidence, I received a phone call from someone at Intuit yesterday afternoon, asking if I wanted to help build the website by supplying articles.  As Professor Beyer points out, the website is meant to be a "wiki-based" information tool -- if I understand correctly, anyone registered at taxalmanac.org will be able to edit any article on the site.

I told the Intuit representative that I would think about it, but it's fairly unlikely that I will participate. 

First there's the issue of free content.  Intuit (from this) appears to be a fairly profitable company, with net income over $300 million per year in each of the past three years. I, on the other hand, do not have net income over $300 million per year (I know -- shocking, isn't it?).  Intuit hasn't created this website out of the goodness of their hearts -- they think it will lead to even more income for them.  That's great (viva capitalism), but why would I want to help Intuit build their business for free?

I'm sure Intuit would tell me that the quid pro quo is my articles in exchange for the wealth of information I can find at taxalmanac.org.  And, indeed, there are some good aspects to the site -- it offers up-to-date versions of the Internal Revenue Code and Treasury Regulations.   However, I'm simply not sure about the quality of the other information offered on the site, mostly because of its nature.  I know that people such as Jeff Jarvis like the idea of wikis, and think that they can serve to democratize the internet.  However, when I use the internet for law-related research, my one and only goal is accuracy.  My understanding is that the articles at taxalmanac.org are both posted and edited anonymously, which means (a) I don't know the credentials of the person who originally posted an article, and (b) I don't know the credentials of the person or people who edited the article.  If that's the case, then how can I rely upon the information in any of the articles I find at the site?

Gifts of Real Property and the $250,000 Capital Gains Exclusion

Robert J. Bruss makes some interesting points in his recent "Real Estate Mailbag" column, found in the Washington Post (and here).   Some background: §121 of the Internal Revenue Code excludes real estate from capital gains tax under certain circumstances.  Basically, you can exclude from taxation up to $250,000 in gains on the sale of real estate, so long as you have owned and occupied the real estate as your principal residence for at least 2 of the previous 5 years.  With that in mind, Mr. Bruss considers a case where a woman transferred her home to her child as a gift (the child now wishes to sell the home).  Mr. Bruss concludes that the transfer was a big mistake, at least for tax purposes -- the child doesn't meet the requirements under §121, and will owe taxes on his or her gain (the difference between the sales price for the home and the child's basis in the home).

A similar question involves a parent who places his or her child on the title to the parent's home as a joint tenant.  I've previously talked about how such an arrangement is a bad one from an estate planning and property perspective.  It also seems to me that, under this scenario, the child would not be eligible for the $250,000 exclusion from capital gains for his or her one-half interest (unless, of course, the child owned and lived in the home for the time period set forth in §121).  The parent, of course, would still have his or her $250,000 exclusion, to apply to his or her one-half interest.

Gifting, Part 3: Naming a Joint Tenant

It just struck me that this series on gifting should really be called "The Good, The Bad and The OK."  I've already talked about the "good" -- easy-to-make gifts that don't require the aid of an attorney and don't cause gift tax problems.  Now on to the bad, starting with the gift that results by naming someone as a joint tenant of your property.  In this article (from my regular website), you can read about why that's not such a good idea.  [added on 5/5/05: You may also want to review this article from the new You and Yours Blawg, an interesting new estate planning-tax-elder law blog that is written by a New Jersey attorney.]

In the next week or so, I'll talk about another bad gifting idea (loans to family members), and then discuss some "OK" ways to give away property (i.e. methods with some benefits and some drawbacks).