Authored by: Neeli G. Shah
Many opportunistic taxpayers rushed to make year-end gifts during 2012. As a result, a record number of 2012 gift tax returns are expected to be filed in 2013. These returns were due yesterday, April 15, 2013, although the due date can be automatically extended by six months. The importance of accurately reporting and timely filing a 2012 gift tax return should not be understated, even if no gift tax is expected to be due. This is especially true if you made gifts to a trust for the benefit of your grandchildren; gift-split with your spouse; or made gifts using a defined value clause.
Unless your accountant specializes in filing gift and estate tax returns, chances are he or she may not be familiar with certain details involved in filing a Form 709 – Gift (and Generation-Skipping Transfer) Tax Return (“Form 709” or “Gift Tax Return”). It is advisable that your estate planning attorney, who is more familiar with your gifting program, consults and discusses the nature of your gifts with your accountant, before he or she prepares your 2012 Gift Tax Return. It is also recommended that your estate planning attorney review the Gift Tax Return before it is filed with the Internal Revenue Service (“IRS”).
Here are a few points to keep in mind to avoid some common (and costly) mistakes when preparing your 2012 Gift Tax Return(s):
1. Election to split gifts between spouses. If you are gift-splitting, the non-donor spouse’s consent must be signified on the first Gift Tax Return reporting the transfer that is filed with the IRS. Failure by non-donor spouse to consent by signing Line 18 of Form 709 can result in the IRS treating the entire gift as being made by one spouse and can result in significant gift tax to the donor spouse. Also, a split-gift election must be made as to all gifts, except gifts to the donor’s spouse, by the donor during the calendar year. The donor’s spouse cannot select which gifts made by the donor will be split.
Last year was also the year of the spousal lifetime access trust (“SLAT”), a trust created for the benefit of a spouse and descendants. Notwithstanding the above, gifts to a SLAT (allocated to the donor’s spouse) generally cannot be split by the donor’s spouse and careful attention should be given to accurately report such gifts. However, this does not prohibit the donor’s spouse from splitting the remaining gifts made by the donor.
2. Allocation of GST Exemption. If you made gifts to a trust that may benefit your grandchildren or more remote descendants, even if they are contingent beneficiaries, your Gift Tax Return should make the appropriate election either to allocate your generation skipping transfer (“GST”) tax exemption ($5.12MM in 2012) to the gift or to opt out of any automatic allocation that may apply, as determined by your estate planning attorney. While a taxpayer’s GST exemption is automatically allocated to certain GST Trusts (a defined term under the Internal Revenue Code (“Code”)), taxpayers and preparers are advised not to rely solely on these automatic allocation provisions as they may cause unintended tax consequences. It is recommended that you make an appropriate election in or out of GST automatic allocation rules on the Gift Tax Return with regard to such transfers. Also note, a timely filed Gift Tax Return allocates the GST exemption to a transfer as of the date the transfer was initially made, while with a late filed Gift Tax Return, the allocation is deemed to be made on the date that the late return is filed.
3. Adequate Disclosure. The IRS generally has three years from the date a Gift Tax Return is filed to challenge a gift or other transfers disclosed on the return. However, this three year period does not begin to run unless the gift is “adequately” disclosed as provided under the Code and the Treasury Regulations thereunder. It is important that either your estate planning attorney or your accountant or both confirm that proper appraisals were obtained for the gifts and the gifts are adequately disclosed on the Gift Tax Return to start the three (3) year statute of limitations. This is especially important for taxpayers who made formula or defined value gifts in 2012 (perhaps in reliance on Wandry v. Commissioner). The Gift Tax Return should include appropriate documentation to show that the amount transferred is determined pursuant to the formula contained in the transfer documents; in no event should a taxpayer report the transfer as a fixed percentage interest of the property.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.