Somehow, it’s October tomorrow and that means that 2012 is drawing to its end. If you have been thinking that this would be a good year to make a gift to your children, you’d better act soon, not just because the holidays will soon be upon us, but because making a gift that’s larger than $13,000 requires that you take certain steps before the gift is made.
Unless you’ve been living an unusually sheltered life, you are probably aware of the fact that until December 31, 2012, each of us is able to give up to $5.12 million dollars away, free of gift tax. That’s not just an incredibly large exclusion from the gift tax — that’s the largest exclusion that there’s ever been from the gift tax. Unless Congress acts before the end of this year, the current law will expire in 2013, and the gift tax exclusion will return to what it was in 2001, $1 million. Not only that, but the top gift tax rate will return to its 2001 level, 55%, up from the current rate of 35%,
For this reason, we’ve had a lot of inquiries from clients about making major gifts before the end of the year, either outright, in trust, or via gifts of percentage interests in a limited liability company (LLC) or family limited partnership (FLP). We love to help our clients achieve their goals, and, of course, we love hearing from them, but what some of them don’t know is that even though a major gift this year is free of the gift tax, it still must be reported on a Gift Tax Return (Form 709) by April 15th of the year following such a gift.
The IRS requires that you adequately disclose each gift that you make that exceeds the annual gift tax exclusion amount (currently $13,000) on the Gift Tax Return. Adequate disclosure means that you describe what you transferred, and, most importantly, properly determine the fair market value of the gift. Gifts of cash and securities are easy to value. Gifts of other items, like jewelry or valuable art, must be appraised by someone qualified to determine that item’s value–such as an auction house.
For gifts of real property, which are the ones we’ve been asked about the most, you must attach an appraisal by a qualified appraiser. A ‘qualified appraiser’ is not your friend down the street who dabbles in real estate and is willing to do a quick set of comps for you— it means an appraiser who is qualified to appraise the kind of property you are giving (residential v. commercial v. farm land or undeveloped land) and who can prepare an appraisal in accordance with generally accepted appraisal standards. And guess what? Appraisers are really busy right now! So if you want to make a gift before the end of the year, now would be the time to get that appraisal done.
If you are reading this and thinking that you had the mountain cabin appraised two years ago as part of your last re-fi, that won’t be sufficient. The IRS wants the appraisals to be accurate and timely. We advise our clients that, if possible, they get the appraisals done within 60 days of making the gift–a deadline which comes from the IRS requirements for a charitable donation, but one that we think is an excellent rule of thumb for non-deductible gifts as well.