Gifts can be a helpful way of reducing estate tax liability.
Estate taxes can cost certain estates significantly.
Because taxes can reduce inheritances to heirs, it is not surprising when people try to plan strategically to reduce these costs.
Sometimes these give rise to cases and questions in Tax Court.
According to a recent accounting WEB article titled “Tax Court Says When Deathbed Gifts Are Complete,” one recent case revolved around deathbed gifts.
Why would a deathbed gift be subject of a court case?
Lifetime giving is a prominent strategy for reducing the size of an estate to reduce liability for estate taxes.
The type of gift is important to how it is treated in relation to the estate of an individual.
The two primary ways gifts are categories is the annual gift tax exclusion and the unified estate and gift tax exemption.
With the annual annual gift tax exclusion, you can make gifts without incurring gift taxes.
In fact, such transfers need not be reported to the IRS.
The exclusion amount for 2022 is $16,000 for individuals and $32,000 for gifts from married couples filing jointly.
It can be easy to reduce the size of an estate through lifetime giving using the annual gift tax exclusion.
If you and your spouse maxed out your gift exclusion to five family member over five years, you will have transferred $800,000 out of your estate without owing taxes on these gifts.
How are gifts treated under the unified estate and gift tax exemption?
If a gift is made and part of the gift and estate tax exemption is used, then the amount will be taken from the available exemption.
At this time, a person has an exemption of $12.06 million in 2022.
In 2026, this amount will be reduced to $5 million plus inflation indexing.
If a person uses $1 million of the gift and estate tax exemption and dies in 2022, then this individual will only be able to shield $11.06 million from estate taxes.
How does these situations apply to the deathbed gift case in tax court?
The case involves a Pennsylvanian resident who signed a Power of Attorney in 2007 to give his son authority over financials.
The son was specifically given authority to make gifts as long as they remained at or below the annual gift exclusion.
This son arranged gifts to himself and family members from 2007 to 2014.
In 2015, the father passed away on September 11.
On September 6, his son made checks to family and friends totaling $464,000 from an investment account.
Some of the checks were deposited before the father died … and some were deposited after his death.
The Tax Court was tasked with determining whether the latter gifts were to be treated as removed from the estate of the decedent.
The IRS said the checks deposited prior to the death should be considered excluded from the estate.
What did the Tax Court decide?
It included the non-deposited checks in the estate of the decedent.
What does this mean?
Gifts used as part of the annual tax exclusion to reduced the size of an estate should be deposited in a timely manner to fulfill their purpose and remove funds from the taxable estate.
Reference: accounting WEB (Aug. 26,2022) “Tax Court Says When Deathbed Gifts Are Complete”