Slideshow 6 Year-End Gifting Rules Every Investor Needs to Know

  • December 29 2011, 12:07pm EST
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6 Year-End Gifting Rules Every Investor Needs to Know<br><br>

The principle behind the annual gift tax exclusion is to shelter gifts commonly made on birthdays, holidays, weddings and other special occasions. However, many high-net-worth individuals may also utilize the annual gift tax exclusion as a strategy to mitigate the impact of future estate taxes.

According to Richard Behrendt, director of estate planning for Baird’s Private Wealth Management group, the timing of making year-end gifts is important because a transfer of property is treated as a completed gift for federal gift tax purposes only after the donor has unconditionally relinquished all dominion and control over the transferred property.

Even if the donor has no intention of revoking (taking back) the gift, simply retaining the ability to revoke the gift through the end of the year could shift the completion of the gift into the next calendar year.

Under the Internal Revenue Code, individuals may give up to $13,000 to an unlimited number of non-charitable beneficiaries in each calendar year. Married couples may double-up and make combined gifts of up to $26,000 to children, grandchildren, or other non-charitable beneficiaries.

Here are six rules investors need to consider before making any year-end gifts.

1. Gifts By Check<br><br>

A gift by check is completed when the following two events have occurred, (1) the donor has delivered a check to the donee with the intent to make a gift, and (2) the donee has deposited or cashed the check at the donee’s bank.

Technically, the donor retains the ability to stop payment on the check or withdraw funds from the account until the time the check is presented by the donee’s bank to the donor’s bank. However, courts have ruled that the earlier presentation of the check by the donee to their bank is sufficient to complete the gift.

For example, if a grandparent with the intent to make a gift delivers a check to a grandchild in late December 2011, the gift will be deemed to have occurred in 2011 if the grandchild presents the check to their bank (for deposit or cash) no later than Dec. 31.

The timing of the gift could be critical if the grandparent is in failing health and intends to immediately utilize the annual gift tax exclusion for the following year by making another $13,000 to the same donee on Jan. 1, 2012.

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2. Gifts Of Securities<br><br>

A gift of securities is subject to the same basic rule that a gift is complete only after the donor has unconditionally relinquished all dominion and control over the transferred property. As a result, a donor’s verbal or written instruction to a broker to transfer securities to a donee’s account is not sufficient for a completed gift until the securities are physically transferred and the donor no longer possesses the ability to rescind the transfer instructions.

For example, if a donor delivers written instructions to his broker on Dec. 31, 2011 to transfer $13,000 worth of securities to a donee’s account, but the securities are not transferred to the donee’s account until Jan. 1, 2012, the annual gift tax exclusion for 2011 could be disallowed by the IRS on the grounds that the gift was not completed until 2012.

A gift of corporate stock in certificate form is a completed gift when the donor endorses the stock certificate and delivers the certificate to the donee or the donee’s agent.

3. Joint Accounts<br><br>

If another person is added to an existing joint bank account or brokerage account, no gift is made until the other person withdraws on the account for his or her own benefit. The amount of the gift is equal to the amount the donee withdraws from the account without any obligation to repay the donor or use the withdrawn funds for the donor’s benefit.

For example, if an elderly parent adds a son or daughter as a joint-owner on the parent’s checking account as a mere convenience, and the child withdraws funds only as needed to pay the parent’s recurring bills and expenses, no gift has been made.

4. Large Gifts<br><br>

If there is a need or desire to make gifts above the current $13,000 annual gift tax exclusion to one or more individuals, donors may use some or all of their federal exemption amount, which is $5 million for 2011.

The exemption is scheduled to increase to $5.12 million for 2012, but it may revert to $1 million in 2013 if Congress does not extend the higher exemption amount beyond 2012.

Donors should consult with an attorney or accountant about the tax reporting requirements of making gifts above the $13,000 annual gift tax exclusion amount.

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5. Charitable Gifts<br><br>

The timing rules for making charitable gifts are more favorable to taxpayers. A charitable gift by check is deductible by a donor in the year a check is mailed, even if the charity does not cash or deposit the check until the following year.

Similarly, charitable gifts charged to a credit card are deductible in the year made, even though the credit card bill is paid the following year. Only donations to qualified charitable organizations are tax-deductible.

6. The Clock Is Ticking<br><br>

A good rule of thumb may be to not wait until the last minute to make year-end gifts. If tax considerations are important, additional steps may also need to be taken. Donees should be advised to present gift checks to their bank on or before Dec. 31 if the donor is hoping to qualify the gift for this year’s annual gift tax exclusion.

Making gifts above the annual gift tax exclusion amount may require filing a federal gift tax return. For additional guidance, consult with your financial advisor and tax professional.