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Good Reason to File a Gift Tax Return
If you make lifetime gifts to reduce your taxable estate, you may not even have to file a gift-tax return. However, in some cases, you should do it anyway. Filing a return anyway may save your family a great deal of bother and money in the future. This is especially true in the case of illiquid, hard-to-value assets, such as stock in a privately held business. You are allowed to give up to $11,000 worth of gifts, tax-free to as many recipients as you want each year. And if you stay within this limit, no tax return filing is required. Married couples can give up to $22,000 to each recipient. However, if one spouse provides most of the gift, the other spouse must indicate approval on a gift tax return. When you hand out cash or shares of publicly traded companies, there's no problem. Just be sure to keep records of the transaction in a safe place. But consider what can happen if you give away shares in your company or a portion of a real estate property. Those are hard to value assets. You give your son $20,000 worth of stock in your company, valuing it at $10,000. So no gift-tax return is necessary. But after your death many years later, your estate tax return is audited and the IRS questions the value of the transfer. Unless your executor can justify the valuation-which can be difficult to do decades later-your estate may face an enormous bill for back taxes, interest and penalties. Fortunately, there's a "safe harbor" you can use for protection. File a gift-tax return and attach an explanation justifying your valuation. Under a recent change in the tax law, the clock starts running once you file a gift-tax return. Assuming all valuations are adequately disclosed, the IRS has three years to question a gift-tax return. You're home free once three years pass. The IRS can't look back at your gift-tax return 25 years from now and demand more information from your executor. A similar situation arises when you make gifts to grandchildren or to a trust that names your grandchildren as beneficiaries. There's a painful 55 percent generation skipping tax on these transfers, as well as a $1 million lifetime exemption from this tax. By filing a gift-tax return, you can allocate a portion of your generation skipping tax on these transfers, as well as a $1 million lifetime exemption from this tax. This doesn't cost anything and it may help your family avoid the dreaded tax. Please consult with our office if you have any questions about these matters. |