Gift Giving and Your Financial Plan

The end of the year is always a good time to be sure that any new purchases made during the year were properly titled. You should also complete a Financial Analysis Worksheet to update information about your assets, liabilities and net worth. If there has been any significant change in your assets and/or total net worth, you may want to discuss this situation further with your financial advisor, especially as the effective exemption amount increases over the years. The effective exemption amount for year 2008 is $2.0 million.

The end of the year is also a good time to be sure that all gifts made during the year have been properly documented. At our firm, we like to ensure that our clients comply with the adequate disclosure requirements by disclosing all completed gifts on Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax Return, and attachments thereto, to establish value for gift and estate tax purposes. This is particularly important for gifts of hard-to-value assets, including real estate and closely held business interests, whether the gift appears to be covered by the annual exclusion or not. If necessary, you can engage a qualified appraiser for these assets.

By adequately disclosing the gifts on the gift tax return or an attachment thereto, you will start running the three-year statute of limitations that prevents the IRS from later revaluing the gift for gift and estate tax purposes. If you do not adequately disclose the gift (per the Adequate Disclosure Rule), the IRS may attempt to revalue the gift at any time. Revaluation may result in you (or your heirs) paying significantly more gift and estate tax.

You should discuss all gifts made during the year with your tax preparer who can also tell you if there could be transfer tax valuation implications if gifted property, such as business interests or real estate, have not been reported or adequately disclosed over the years.

Based on your current gross estate plus adjusted taxable gifts, your advisor can project what your children may be required to pay with regard to transfer taxes. You should know whether gift tax returns were ever filed for substantial gifts (more than the annual exclusion amount) over the years as there may or may not be a limitation by the three-year statute of limitations in challenging the value of property transfers. If a transfer involving difficult to value assets, including business interests or real estate, has not been reported or adequately disclosed, the valuation may be disputed for gift or estate tax purposes.

The results of this evaluation will help you determine the potential tax consequences of your estate, your estate’s need for cash and whether this need will be met with insurance, rather than some other source of liquidity. Additionally, you will know if there could be transfer tax valuation implications if gifted property, such as business interests or real estate, have not been reported or adequately disclosed (per the Adequate Disclosure Rule).
Resources: For more information about the decision to gift or bequeath assets in light of the scheduled repeal of the estate tax as part of the Economic Growth and Tax Relief Act of 2001, see Chapter 9 of my book Securing a Retirement Income for Life: Strategies for Managing, Protecting and Preserving Your Wealth.