Personal Finance: Ask the Experts

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

September 27, 2012
Should Mom gift now, or wait for Congress to act on estate tax?

Q: I'm concerned with the possibility that Congress may fail to act to put in place a rational 2013 estate tax law, instead letting the estate tax exclusion return to $1M per individual ($2M per couple). I'm responsible for managing my mother's estate plan. Her estate consists of $3.3M cash and $1.6M real estate. Her deceased husband's irrevocable trust will shelter $900K from estate tax. My plan is to gift assets such that her remaining assets total $1M cash with (hopefully!) no estate tax due at estate settlement.

Is it possible to gift her home ($1.5M) into an irrevocable trust, sheltered from estate tax? If so, what are the other consequence of this action?

How long would you wait on Congress to act before you went ahead with the proposed asset reallocation plan? -- Charles, Sacramento, CA

A: Many tax and estate planning professionals believe that Congress will not act in 2012, but will likely act in 2013 to raise the exemption above the $1 million amount retroactive to January 1, 2013. The current situation makes it extremely difficult to plan, since there is no way to know the outcome.

You say that your plan is for your mother to make large lifetime gifts in 2012 so that she only has $1 million left going forward. Keep in mind that a person's estate tax exemption is reduced by any gifts a person makes using the lifetime gift tax exemption. (Note that annual exclusion gifts, and certain payments of tuition and medical expenses, do not reduce the estate tax exemption.)

So if your mother has not used any of her gift tax exemption during her lifetime, the 2012 gifts would be gift tax free up to $5.12 million in 2012, but they would reduce her remaining estate tax exemption by the value of the gifts (less any part of the gift that uses annual gift exclusions).

In other words, if your mother gifts in excess of $1 million in 2012, and the estate tax exemption decreases to $1 million in 2013, she will have no estate tax exemption left and her entire remaining estate will be subject to tax.

If your mother can afford to make large gifts without sacrificing her standard of living, and wants to make such gifts, I recommend that she make the gifts as soon as possible this year. Any amount gifted is good tax planning to the extent that income from the gifted assets and future appreciation of the gifted assets are both removed from the donor's estate.

Some people are gifting the full $5,120,000 exemption amount this year, since there is a good chance that the exemption will drop from this high level. Any amount gifted this year that is greater than what the exemption ends up being in the future is likely to avoid estate tax in the future; most experts think that Congress will not impose a tax on those bigger gift amounts if the estate tax exemption goes back down. However, we cannot be certain how such gifts will be treated in the future, and there is some degree of risk that they will be taxed at the time of death.

If your mother still resides in her home, that may affect her estate planning options. It is important to work with an experienced estate planning attorney on major gifts like this, because there are strict tax rules about what kind of interest your mother may retain in the house in order for it not to be included in her estate.

There is a specific type of trust called a Qualified Personal Residence Trust or "QPRT" that may fit her gifting needs. She would set up the QPRT now to make a gift of the residence after a term of years. The value of the residence is removed from her estate if she survives the term. At that point in time she would begin paying rent at the fair market value, and the gift recipient would have the power to make all decisions about the house going forward.

Finally, as mentioned above, any asset transferred by gift will retain the donor's basis, which means that any capital gain on the sale of the house would be based on your mother's basis in the house, rather than the value at the time of the gift.

If you are considering making large lifetime gifts this year, consult with an estate planning attorney as soon as possible to identify the best gifting strategy for your mother's specific circumstances. Besides the technical expertise, the involvement of a professional advisor also helps you establish that the gifting is in your mother's best interest, to protect you from charges of conflict of interest as her fiduciary and also as a gift recipient.

You will also need a real estate appraisal to value any gift of the residence.

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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

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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