I guess it would depend on complexity, but we did something similar to you, putting my mom's home into a trust for the kids about 6-7 years ago and it was only about a grand for the lawyer to set things up. I know things change, but 10 years ago (last time I checked <ggg>) there was a 1 million dollar exemption for a person to give money away without paying anything, all you had to do was file a gift tax return with the IRS. I had traded/invested for my mom during those crazy internet boom years in the late 1990's and she was fortunate to do pretty well, so we simply took a chunk of that money and split it among the kids, opening brokerage accounts. All I had to do that year was file the 709. I think at some point since then this exemption may have been raised to 5 million, but I have not kept up. As always, when in doubt consult a competent professional in the field..
John
A Guide to the Gift Tax (for the Very Generous)
By CHARLES DELAFUENTEFEB. 11, 2007
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Nadine Block and her husband, Patrick Vennebush, received money last year from her parents to help them buy their house. CreditKen Cedeno for The New York TimesWHEN you sit down to do your taxes, you remember that very generous birthday gift from your wealthy aunt, and wonder how, and where, you report it, or if it’s taxable at all.
The short answer is that you don’t have to report it, because it isn’t taxable — at least not to you. And what about your aunt: If she gave you more than $12,000, she must fill out a gift tax form, a step that Sidney Kess, a lawyer and accountant in New York, says is “not a big deal.”
She may have to pay gift tax, but only if she has been extremely generous, because the first $1 million in reported gifts over a lifetime does not activate the tax.
Anyone who gave more than $12,000 to any one person other than a spouse last year is required to file Form 709, the gift tax return. Each Form 709 must list the amounts reported on previous years’ 709s, to determine whether the giver has crossed the million-dollar threshold.
Actually, though, it’s possible to give away much more than $1 million before any tax is due, because many gifts need not be reported and are not added into the calculation that establishes the $1 million lifetime exemption. A gift or a series of gifts that add up to $12,000 or less to any one person from any other person in any given year does not have to be reported. For example, a plethora of, say, $10,000 gifts to many different people does not mean the tax will be imposed.
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In fact, it is possible to transfer huge sums of money in just a few weeks, Perry A. Shulman, a certified public accountant in East Rockaway, N.Y., explained. He gave the example of a married couple who give money to a child and the child’s spouse. “If each parent gives the child and the spouse $12,000 each, that’s $48,000. If that gift is made in December, another $48,000 can be given in exactly the same way early in January, for a total of $96,000,” he said.
Money paid for someone else’s medical care or directly to a school or college for someone else’s tuition is also exempt from reporting, regardless of the amount.
The definition of educational institution is “very broad,” said Randi A. Schuster, a lawyer at Holtz Rubenstein Reminick, an accounting firm in New York City. “It can be for nursery school, private grade school, not just for what we normally think of in gifts — paying for college tuition.”
Many wealthy people are using the education-funding exemption as “a pretty savvy way to reduce an estate”— and thus the estate tax due at death, Mr. Kess said. He said that the I.R.S. advised a taxpayer in a private-letter ruling last year that she could pay tuition for six grandchildren years in advance and all at once, and the gifts would be exempt.
A private-letter ruling applies only to the taxpayer who requested it, but it “gives you an idea of the government’s thinking,” Mr. Kess said. He said that “private schools and colleges are seeing a lot more people using that strategy” to minimize taxes, and are encouraging prepayments.
There is a caveat. Proud (and wealthy) new grandparents cannot prepay an infant’s four years at Harvard, because if the child doesn’t go to Harvard, the money is not refundable. But under that private-letter ruling, prepayments for college or even for an entire grade-school and high-school private education could be made as soon as a child is admitted to a particular school, he said.
Julian Block, a lawyer in Larchmont, N.Y., explained, “What people misunderstand is that if you give more than $12,000 in one year to one person, yes, you have to file, but for most people it’s a formality. They don’t actually incur any gift tax liability” because of the gift they made.
Mr. Block used the example of a father who gave a son $50,000 last year; $38,000 is subject to tax. But the $1 million exemption soaks that up — and leaves the father $962,000 for use against future gifts. Gift tax liability — where a check has to accompany the Form 709, “is incurred only by people who are obscenely wealthy,” he said.
In fact, Mr. Block and his wife, Zelda, will have to file gift tax returns this year, because they gave their daughter, Nadine Block, and her husband, Patrick Vennebush, a gift to help them buy a house in Falls Church, Va., a Washington suburb, last year.
But Mr. Block doesn’t ever expect to approach the point where gift tax will be due. “I’d love to become affluent enough to have to pay the gift tax,” he said. “That’s unlikely to happen.”
His daughter, a policy analyst and researcher for a trade association in Washington, said that she and her husband were aware that, as recipients, they did not have to report the gift. Ms. Block and her husband, a curriculum developer for a math teachers’ association, prepare their own return, then give it to her father to review, she said. “I rely on his knowledge,” she said — adding that he usually finds deductions she has overlooked.
When a gift is exempt from the gift tax because it is for someone else’s education or medical care, it is vital for the payment to be made directly to the educational institution or health care provider, said Martin M. Shenkman, an estate-planning lawyer with offices in New York and Teaneck, N.J.
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He said that many people mistakenly think that they can give their child money for a grandchild’s college tuition without regard to the gift tax limits. “That’s a very common mistake” he said, and it can activate the requirement to file a gift tax return, and in some situations, to pay gift tax.
The only exception to the giver-pays rule involves a donor’s nonpayment of gift tax that is due, despite the various exemptions, including the $1 million lifetime exclusion. The instructions for Form 709 say that if the donor “does not pay the tax, the person receiving the gift may have to pay.”
Mr. Shenkman said that “in all my years, I’ve never seen that happen” except, rarely, as part of a prearranged plan among family members. It is unlikely that a donor would inadvertently incur the gift tax in that way, he said. “If you’re giving away a million bucks,” you probably have top-notch legal and accounting advice, he said.
There can be gray areas involving gift taxes, however. Disputes can arise over whether the money or property was a gift. “Was it for services rendered?” Mr. Block asked. If that is the case, it’s taxable to the recipient, he said.
Gifts that exceed the threshold should be reported each year to the I.R.S. on Form 709. Copies should be kept with filers’ permanent tax records, because the executors of their estates will need to refer to those forms to determine whether any estate tax is due. That tax applies to only a small fraction of estates.
Gift taxes that were paid by anyone who leaves a taxable estate can reduce estate taxes, said Diane Giordano, a C.P.A. and certified financial planner at Marcum & Kliegman in Melville, N.Y.
Any part of the $1 million credit used on the gift tax forms reduces the amount of the credit available to an estate, which is $ 2 million this year, Mr. Shenkman said.
“You have $1 million to give away during life,” Ms. Schuster said. “At death you have a total of $2 million to give away. If you’ve given away a million worth of taxable gifts, at death you’ll have only a million left to give away.”
There is no Form 709 equivalent of the joint income tax return. If both spouses have to file gift tax returns, each must do so separately. The reporting requirements for joint gifts from a husband and wife are a little trickier. If they agree to split gifts, in many cases either spouse can give up to $24,000 without having to file a Form 709.
There is no income tax deduction for gifts to individuals, as there is for gifts to charities. If a charitable gift is tax deductible, there is no need to report it on a gift tax return, Ms. Schuster said, except when the donor gives less than the entire interest in a property — as is sometimes the case with a trust. Political contributions also do not fall under the gift-tax rules.
There are separate, more complicated tax rules for what are known as generation-skipping transfers, which are usually to grandchildren.
The gift tax rules can confuse even some reasonably financially savvy people. Some donors have been led astray by discussion of a proposed elimination of the estate tax, Ms. Giordano said. “Some people believe there’s been an elimination of the gift tax as well,” she said. Others think that recent changes to the estate tax apply to the gift tax, but, she counsels them, “there’s been an immaterial amount of changes” to that tax.
ANOTHER point of confusion, Mr. Kess said, is the value of a noncash gift. If someone gives away stock or other property that has gone up in value since the donor bought it, its value when it was given away is the amount reported on the gift tax return — even though the lower amount becomes the recipient’s basis for figuring profit or loss when that property is sold.
Ms. Schuster said that some people were becoming confused about the regulations for 529 college savings plans. A contribution to someone else’s 529 plan is a gift, subject to the $12,000 exclusion rule. Under a special tax-law provision, a donor can give up to $60,000 to such an account at once and use up five years’ worth of $12,000 annual exclusions.
But then the donor cannot legally make any more exempt gifts of any size to the recipient for five years — not even a birthday gift. “Just a card,” she said.
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