Upstate Estate Law, P.C. Blog

Installment G of A to Z is Gift Tax Exemption and Exclusion. The federal government imposes a gift tax on gifts. (Most states, including South Carolina, do not impose a gift tax.) The maker of the gift is generally liable for the tax on the gift. However, all of us are permitted to make a certain amount of gifts without incurring any tax.

The gift tax exemption is the amount of gifts that people can make during their lifetime without having to pay gift tax upon their deaths. This is the lifetime gift tax exemption amount and it currently stands at five million dollars. (The gift tax exemption is unified with the estate tax exemption, so any amount of gifts that reduces your gift tax exemption reduces your estate tax exemption dollar for dollar.)

For example, if you were to make taxable gifts totaling four million dollars during your lifetime, and upon your death you leave a taxable estate worth three million dollars, the four million dollars in gifts will reduce your unified gift tax/estate tax exemption by four million dollars. How much exemption you have left depends on the exemption amount in the year in which you die. This is what is meant by the unified gift tax/estate tax: Taxable gifts made during your lifetime can decrease the amount of estate tax exemption available to your estate after your death.

The other gift tax concept is the gift tax annual exclusion. The gift tax annual exclusion amount currently stands at $13,000.00 per year per person receiving a gift (in 2018 the amount is $15,000.00). This means that you may gift up to $13,000.00 per person per year without reducing your gift tax lifetime exemption amount. Spouses have the option to elect to double the amount of gift they can make to any one person during the year without reducing their lifetime exemption amount, this is called “gift splitting.” Spouses can do this even if the source of the gifts is with one spouse only. This election is made on the gift tax return.

Speaking of gift tax returns, when is one required to be filed? A gift tax return must be filed with the IRS when any person makes a gift to any other one person in a given year in an amount greater than $13,000.00 (or $26,000.00 if spouses elect gift splitting.) Also, a gift tax return must be filed whenever spouses elect gift splitting for a gift made. The gift tax return is generally due by April 15 of the year following the year of the gift. If the gift maker has died before the return is filed, his or her Personal Representative must file the return, and a Personal Representative is permitted to elect gift splitting for gifts made prior to the gift maker’s death.

Unless you give away an amount greater than your gift tax lifetime exemption amount, no gift tax must be paid when the gift tax return is filed. The tax is instead determined after death through the concept of the unified gift tax/estate tax exemption, as described above, ie, the gift made during lifetime reduces the gift tax/estate tax exemption after death.

So there you have a brief primer on the gift tax exclusion and exemption amounts and their interplay with the estate tax regime.

I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Oh, and the IRS would like me to let you know that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

Installment F of A to Z is FIDUCIARY. A fiduciary is a person (or organization) that undertakes to act as an agent for another person. In the trust and estate context, a fiduciary is a person or entity who undertakes to manage the assets of another person. A fiduciary who manages the assets of a deceased person is called the Personal Representative (in other states this is called the Executor or Administrator), or it is a trustee who is overseeing the trust assets of a deceased person. A fiduciary who manages the assets of a living person is the conservator of an individual (appointed by the Probate Court), or could be a trustee of a trust for a living person.

The concept of a fiduciary has been around for ages. The fiduciary relationship gives rise to several duties that the fiduciary owes to the individual on whose behalf he or she acts. There is a duty of care owed by the fiduciary. An example of this is the duty of the fiduciary to perform due diligence when investing assets under his or her care. There is a duty of loyalty owed as well, which is illustrated in the duty of the fiduciary to be concerned only with what is in the best interest of the individual for whom he or she acts, and not the fiduciary’s own self interest. The great jurist Benjamin Cardozo wrote what is possibly the most famous description of the duty of loyalty when he wrote: “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd.” Meinhard v. Salmon, 249 N.Y. 458 (1928).

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

I am sometimes asked by potential clients that they would like me to prepare a “simple” Will for them. And I often wonder how the person knows that they require a simple Will.  Furthermore, what is considered a simple Will anyway? Isn’t asking for a simple Will similar to walking into a car repair shop and telling the mechanic “Hey, my car will not run. I would like a simple repair please.”

Your Will may be a simple matter. True. But it may not be. And you as the potential client may not be in the best position to judge this. A number of factors go into potentially complicating an estate plan. As just a few examples, second or troubled marriages tend to complicate things; step children in the family can complicate things; disinheriting potential heirs can complicate things; minor or disabled persons as potential beneficiaries complicates things, missing heirs can complicate things; potential estate tax liability can complicate things; potential income tax liability on retirement accounts can complicate things; and so on.

When you go to an attorney for estate planning services, these are the types of issues that will be dealt with. In each of the above scenarios, a simple Will likely may not be sufficient to protect you, your assets, and your family. While the final estate planning product may appear to be simple, when you are considering protecting your family and your assets, the process to arrive there should not be simple, it should be thoughtful and well-considered.

That is what I would like to be asked for. “A thoughtful and well-considered estate plan.”

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Installment E of A to Z is ESTATE TAX EXEMPTION.  This is an estate tax term that is equal to the amount of assets that an estate can transfer without incurring estate taxes. The related term is the estate tax exemption credit, which is equal to the amount of estate tax credit against the estate tax.

The federal estate exemption credit has been tinkered with mightily over the past decade or so.  For the years 2011 and 2012, the federal exemption is equal to $5,000,000.00, which corresponds to an estate tax credit of $1,730,800. Alas, beginning January 1, 2013, the estate tax exemption credit is scheduled to be reduced to $1,000,000.00, unless a new law is enacted by Congress between now and then.

If you are curious as to what the South Carolina estate tax exemption amount is, SC does not currently impose a separate estate tax. See my prior post where I discuss the unceremonious end of the South Carolina estate tax here.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation. 

Installment D of A – Z is DISCLAIMER.

Internal Revenue Code section 2518 allows a South Carolina beneficiary to execute a qualified disclaimer, resulting in transmission of the disclaimed property as if the disclaimant had predeceased the decedent. Utilizing disclaimers as part of the estate plan builds in flexibility.  This technique can be used in the context of disclaimer trust planning for estate tax purposes, or in the context of IRAs and qualified plan transmission to accomplish favorable income tax treatment, to describe but a few uses.

Treasury Regulation section 25.2518-2 lists the following “Requirements for a Qualified Disclaimer”.

(a) In general. For the purposes of section 2518(a), a disclaimer shall be a qualified disclaimer only if it satisfies the requirements of this section. In general, to be a qualified disclaimer—

(1) The disclaimer must be irrevocable and unqualified:

(2) The disclaimer must be in writing;

(3) The writing must be delivered to the person specified in paragraph (b) (2) of this section within the time limitations specified in paragraph (c)(1) of this section;

(4) The disclaimant must not have accepted the interest disclaimed or any of its benefits; and

(5) The interest disclaimed must pass either to the spouse of the decedent or to a person other than the disclaimant without any direction on the part of the person making the disclaimer.

The use of qualified disclaimers should be carefully thought out, and quite frankly, should only be utilized under the supervision of an attorney or tax professional. Disclaimers can be tricky. I have heard the following horror story arise from the uninformed use of disclaimers: A man died without a Last Will. Under SC intestacy law, the beneficiaries of the estate were to be the man’s surviving spouse and his two children. The two children wanted to do the “right thing” by their mother and signed a disclaimer of their inheritance.

The problem? Well, the two children had children of their own. When you disclaim an inheritance, the disclaimed property is treated as though the disclaimant predeceased the Decedent. In this case, under South Carolina’s anti-lapse statute, the inheritance that was disclaimed did not go to the Disclaimants’ mother but instead went to the disclaimants’ children. Making things worse was that the disclaimants’ children were minors, who would have a guardian ad litem appointed for them by the Probate Court to protect their newly created property interests.

The moral of the story is that qualified disclaimers of property should only be undertaken under the supervision of an experienced estate attorney who will carefully analyze the law to determine where the disclaimed property would go after the disclaimer is made.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.