With the April 15 deadline for filing tax returns fast approaching, financial advisers face a deluge of tax returns involving substantial gifts — a vestige of clients' giving spree due to their tax uncertainty late last year.
Doubt about the future of the lifetime gift tax exclusion sparked a big increase in giving from the high-net-worth crowd at the end of last year.
Indeed, the 400 largest charitable organizations received a total of $76.2 billion in private support last year, up from $70.3 billion in 2011, according to the Journal of Philanthropy.
Accordingly, there was also a pickup in property transfers — gifts — from one individual to another toward the end of last year, according to accountants.
“A lot of people, because they were unsure of how the taxes would play out, figured 2012 would be the last opportunity to make major gifts,” said Barry C. Picker, an accountant with Picker & Auerbach CPAs PC. “Now the gift tax returns need to be filed.”
The annual exclusion for gifts last year was $13,000 per individual recipient. Amounts over that limit are subject to the gift tax, which was a maximum of 35% in 2012.
Last year, individuals also were subject to lifetime exclusion for gifts of $5.12 million.
Amid congressional foot-dragging as the fiscal cliff loomed late last year, many wealthy individuals expected that they would be able to give less both annually and over the course of their lifetime, so they rushed to make transfers before the end of the year. Things probably won't be as frenzied this year, as the 2013 lifetime exclusion is $5.25 million and the annual exclusion has been raised to $14,000.
"EXCLUSION AMOUNT'
“Nobody knew the exclusion would stay high, so smart clients took advantage of last year's high exclusion amount and moved money into irrevocable trusts for the kids' benefit or they moved business assets to them to take get assets out of the taxable estate,” said Susan Hartman, a wealth strategist at Raymond James Financial Inc.
Those who made transfers need to file to the Internal Revenue Service Form 709, the gift and generation-skipping transfer tax return.
The complexity and potential pitfalls behind filing this form depend on the gift involved.
Cold, hard cash, for example, is a relatively straightforward gift. Securities, and other assets, can be more complicated.
For example, donors need to report the cost basis of any stocks that they donate, and recipients should be aware of it for when they decide to sell the interest.
“It becomes a sticking point with some people; the cost basis carries over to the recipient,” Mr. Picker said. “I hear anecdotally that a lot of people miss the boat on that.”
However, even with cash gifts, donors can accidentally overlook the amount that they had donated in multiple gifts over the course of a year and then end up surprised that they have to file a return.
“You might give someone $13,000 in gifts during the year and then, later that year, write that person a $500 check for their birthday without realizing that you went over the limit and now you have to file a return,” Mr. Picker said.
Spouses can exclude up to $26,000 together in donations for 2012 ($28,000 this year), but each individual is still subject to that $13,000 exclusion limit.
Enter the concept of gift splitting, which allows donations to be divided among the two so that both spouses individually end up under the $13,000 limit — ensuring that they won't have to pay taxes on excess amounts.
SOME HITCHES
But as with many tax-related issues, there are hitches to dividing gifts, according to Robert S. Keebler, partner at Keebler & Associates LLP.
“We have to understand who can gift-split and who can't,” he said.
In these situations, both spouses must be U.S. citizens or residents. Spouses are allowed to split gifts only if both of them provide consent to doing so; each spouse must sign the other's return, and both must provide consent to gift splitting by April 15.
When using this strategy, both spouses are jointly and individually liable for gift taxes.
“It's a complex area of reporting, and there are lots of mistakes that can occur for different purposes,” said H. Arthur Graper, managing director at Atlantic Trust Private Wealth Management. “There's a push to get these filed by April 15 because of volume.”
dmercado@investmentnews.com Twitter: @darla_mercado
