First some background. Gifts to your spouse are sheltered by an unlimited marital deduction, and the first $10,000 of gifts made to other individuals are also exempt from tax.
A gift tax return is generally not required for gifts qualifying for the marital deduction. On the other hand, a gift tax return generally must be filed for all gifts in excess of $10,000 per donee (the person receiving the gift) per year.
Just like your income tax return, your gift tax return is due on April 15th. The IRS has three years from the date a gift tax return is filed to make a gift was worth more than the value shown on your gift tax return.
But in the past, there was a catch. The estate and gift taxes are unified so that a single graduated rate schedule applies to cumulative lifetime and death transfers.
Okay, let's hear the drum roll for the new law: For gifts made after August 5, 1997, the IRS can no longer revalue lifetime gifts for estate tax purposes. You must report the gift on a gift tax return. The value of the gift must be shown on the return or in a manner adequate to disc lose to the IRS the nature of the gift. After three years the IRS (and you) are bound by the values shown on the return.
What to do for absolute protection.
Except for cash gifts, report all giftsparticularly gifts involving any kind of family business or partnership-on a timely filed gift tax return.
Use A Corporation For More
Generally, business owners invest to save income taxes, reduce or eliminate estate taxes, and stay in control of the property for as long as they live. Naturally, they want all the income and wealth to stay in the family. Sounds impossible.
Just follow these three simple steps.
Step 1: Form a new corporation and elect S corporation status.
Step 2: Exchange the investments for stock in the new S corporation. This transaction is tax-free.
Step 3: Over time, gift portions of the S corporation stock to your children, grandchildren or others. Gift to a maximum of 49 percent of the stock. By keeping 51 percent of the stock, you will always be in control of the S corporation. Or keep control by issuing voting stock (say 100 shares, which you keep) and non-voting stock (say 9,900 shares, which you give to the kids over time). Now, let's take a look at the tax consequences.
Gift tax. You can gift up to $10,000 tax free per year to each donee (the person receiving the gift). If you are married, you can double the amount to $20,000 by having your spouse consent to the gift. It is smart not to exceed the $10,000/$20,000 value per year limit. Spread your gifts out over two or more years as necessary.
Income tax. The stockholders pay tax on their proportionate share of the income. For example, let's say the income of the corporation was $10,000 for the year and the kids owned 60 percent of the stock (all non-voting). Their share of the income would be $6,000; yours would be $4,000. This is a great way to build an education fund for the kids.
Estate tax. The shares of stock owned by the other members of the family will not be included in your estate. The top estate tax is 55 percent. So, you can see significant savings are easily attained.
One warning: You must operate like a corporation. Title to the assets must be in the corporation's name. Actually issue certificates of the S corporation stock to each stockholder. Keep corporate minutes. Ask your professional advisor to make sure you follow all the necessary details.