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Gift taxes can be confusing

By ALAN S. NOVICK
Scripps Howard News Service
November 24, 2021

 
- The rules about gift taxes continue to produce questions. Here is a recent question from a reader: "After reading your article about the $11,000 gift tax benefit I would like to know if the 'separate individuals' receiving the gift can be husband and wife. My wife's mother recently died and left a sum of approximately $40,000, but not in a will, to her husband to be given to my wife and myself after her passing. Can he write a check for each of us for $11,000 this year, and then for the balance of $18,000 in two checks of $9,000 each early next year, without becoming subject to gift taxes?
 
The answer to the question is yes.
 
The annual gift tax exclusion rule applies to gifts to any number of separate individuals. They can be husband and wife, friends, brothers and sisters or any group of individual persons. If an ardent fan wanted to give $11,000 to each member of the high school football team, he could do so without the imposition of any gift tax.
 
In further answer to the reader's question, he should be reminded that in addition to the annual exclusion of $11,000, each individual also has a lifetime gift tax exclusion of $1 million. Thus, in the example above, if the surviving husband does not expect to leave an estate of over $1 million he could give the wife and son-in-law their $40,000 immediately.
 
There would be no gift tax due, but he would have to file a gift tax return showing that the gifts had been made, and that he had used up a portion of his lifetime gift and transfer exclusion. To the extent that any part of the $1 million lifetime exclusion is used up by gifts during life, the taxpayer's estate tax exclusion is reduced when figuring whether his estate owes any estate taxes.
 
Another reader has asked if gifts can be made under a durable power of attorney. The use of the gift tax exclusion is a common method of reducing the taxable estate of taxpayers. It is even possible to make these gifts through the use of a durable power of attorney, if the taxpayer has previously signed such a document and it has specific gift-making powers in it.
 
The Internal Revenue Service has strongly indicated that the durable power of attorney should contain specific language authorizing the gifts. In one particular situation gifts had been made under a New York "short-form" power of attorney. The printed form did not include specific language about gifts or powers to give away the owner's property or money, however the owner had given the named attorney in fact, her daughter, a letter directing her to make gifts pursuant to the signed durable power of attorney.
 
It was necessary to seek a ruling from the IRS as to whether the gifts which had been made pursuant to the authority of the power of attorney were complete and removed the gifted property from the owner's estate for estate tax purposes. The IRS made a complete analysis of the New York statute and law as well as the Federal Tax Code and Regulations relating to gifts.
 
The IRS said, "The Gift Tax Regulations provide that a gift is not complete for federal gift tax purposes until the donor has so parted with dominion and control over the property which he has transferred as to leave him no power to change its disposition whether for his own benefit or for the benefit of another." The IRS went on to note that the legal rights and interests created by a specific instrument are determined under state law.
 
Although the highest New York court had not ruled on the question, the IRS did conclude that the gifts were complete. A specific sentence in the durable power of attorney authorizing such gifts would have avoided the need for seeking the IRS opinion.

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