Year-End Gift Tax Planning

Dear Clients, Colleagues, and Friends

End of year gifting by check is always an issue for those trying to use their annual exclusion amounts, but in 2012 the issue also relates to those attempting to make larger gifts to use their available $5.12M unified credit amount before the scheduled reduction of the unified credit in 2013. The last thing a donor wants to see happen is that a large gift by check that he or she thinks is covered by the unified credit in 2012 is taxed as a 2013 gift and is subject to a substantial gift tax.

The issue with using checks to make gifts is that until the check clears the bank, the donor can revoke the gift by issuing a stop payment or by removing adequate funds from the bank account. A gift that can be revoked is not complete until revocability ends. Thus, a check written in 2012 that does not clear until 2013 is at risk of being a 2013 gift, not a 2012 gift, since the donor could have stopped payment in 2013 before it cleared.

The IRS issued Revenue Ruling 96-56, 1996-2 C.B. 161, which provides a safe harbor mechanism to assure 2012 gift tax treatment. Under that ruling, a gift by check delivered in 2012 will be a gift as of the date the check is deposited or presented for payment if:

  1. the check was paid by the drawee bank when first presented to the drawee bank for payment;
  2. the donor was alive when the check was paid by the drawee bank;
  3. the donor intended to make a gift;
  4. delivery of the check by the donor was unconditional; and
  5. the check was deposited, cashed, or presented in 2012 and within a reasonable time of issuance.

Thus, to assure a 2012 gift, the donor needs to (a) deliver the check to the donee in 2012 (with adequate funds in the bank for it to clear), (b) assure the donee deposits it in 2012 and within a reasonable time of issuance, and (c) not die until after the check clears.

HYCET (Have Your Cake and Eat it Too) Trust®: While very late in the year, there still may be time to make gifts of up to the $5.12M gift tax exclusion, but perhaps you aren’t sure if you may need or want the gift back. The proper structure of the HYCET Trust will give you the flexibility not offered in the traditional third-party irrevocable gift trust structure.

Remember, tax planning is never about making your kids and grandkids richer — It’s about preserving your estate and leaving your investment advisors 100% more corpus on which to generate the investment returns your descendants might need because our generation has committed generational theft in leaving such a large national debt for them to pay off. Certainly, these dire financial conditions will result in your children and grandchildren having much more of a challenge creating a similar lifestyle as this generation enjoys.

To that end, if you have not made gifts using all or part of your unused gift tax exclusion because you may need or want the gifted assets back, but want to capture the exclusion before the law expires at midnight on December 31, 2012, there may still be time to do so. Our office will be open on Monday and reopening on Wednesday and available through the end of the year.

When you combine the “discounts” available when using LLCs and LPs to make the gift, you can leverage the amount of the gift much greater than $5.12M per person. Shifting $5M to $10M gift tax-free from your estate now will in 20 years save your descendants 55% of the value it eventually grows to at the time of your death. This is the most significant wealth transfer planning opportunity as has ever been allowed by the IRS — Don’t let it go to waste…

All of us at Jeffrey M. Verdon Law Group, LLP wish you a safe and glorious holiday and a healthy and prosperous New Year.

Jeffrey M. Verdon, Esq.

Jeffrey M. Verdon Law Group, LLP

Posted in Client Alert.