Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

September 7, 2012
Should a parent be gifting in 2012 to avoid estate tax in 2013?

Q: My 94-year-old Dad now lives with my sister, his home sits empty and his total estate is over $1M by a few hundred thousand. The trust divides his assets equally between four children. My question is: if Congress does not make a move to keep the amount at $5M, would the estate tax be on the entire amount, or the amount over $1M? Second question: Is there any way to reduce this amount below the $1M if they don't? Third question: Can my sister (Trustee) gift each of us the maximum $13,000 annually without paying gift taxes? Since Mom is deceased, can he gift to husband and wife separately or just one gift of $13,000? Please help. -- Sherry, Rancho Murieta, CA

A: Your question #1: If your father has not made any taxable lifetime gifts, the estate tax applies only to amounts over the exemption amount. So if Congress fails to act and the estate tax exemption is reduced to $1 million, your father's estate would owe tax only on any amount over $1 million.

(Note--many authorities believe that Congress will not act prior to January 1, 2013, but will act sometime during 2013 and make the law retroactive to January 1. So we may not know until later in 2013 what the relevant exemption and tax rate are for 2013!)

#2: There are various techniques that your father could use to reduce the value of his taxable estate. One of the most common methods is to make non-taxable "annual" gifts, if he is comfortable parting with the money. Your father could make annual gifts now for 2012 of up to $13,000 per gift recipient, to an unlimited number of people including the four children, grandchildren, other relatives and/or other friends, without being subject to gift tax. He could repeat these gifts again in early 2013.

Additionally, the tax code allows your father to make payments in any amount for tuition or medical expenses for any person, so long as the payments are made directly to the provider.

Your father could also make gifts greater than $13,000 to individuals this year, but these gifts would need to be reported to the IRS next year on a Form 709 gift tax return.

#3: If your father is still capable of making his own financial decisions, he should decide on and make the gifts himself.

If your father is no longer serving as his own trustee, and your sister is acting as his successor trustee or is acting as his attorney-in-fact under a durable power of attorney, she may be able to make gifts on his behalf. This answer depends on what his trust and durable power of attorney say. The authority to make gifts is strictly regulated under California law, and this authority must be spelled out specifically in the document. Gifts can only be made to permissible donees and any limitations on amount of the gifts must be followed. If the power is not clear in the document, your sister does not have the power to gift.

#4: Your father could gift to a husband and wife separately, each with a gift of up to $13,000 each year, if he so desires.

Before starting any gifting program, your father should consult with his financial advisor, accountant, and/or attorney. He needs to be sure he is not jeopardizing his own security by gifting if he might need the funds for his health or personal care. Some assets might be better for your father to gift than others, for tax purposes.

There are other planning techniques beyond gifting that can be used to reduce the size of a person's taxable estate. I recommend that your father or sister consult with your father's attorney to confirm his affairs are in order, and to ensure that his estate plan carries out his wishes in the most tax efficient manner possible while not jeopardizing his ability to provide for himself.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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