Financial News & TipsAlan S. Moore / L’Observateur / August 22, 2000Filing a gift-tax return even though it’s not required could save your family a great deal of money and hassle in the future. Here’s why.Each year you’re allowed to give up to $10,000 each to as many individual recipients as you want tax-free, without filing a gift-tax return. (The$10,000 figure is subject to an inflation adjustment.) If you give away cashor securities there’s no problem documenting the value of your gifts as long as you keep good records. But what if you give away shares in your closelyheld company or a portion of the real estate you own? How do you ensure that the IRS will not challenge your valuation of the gift at some later time? For example, say you give your daughter some stock in your company each year. You value the annual gift of stock at $10,000, so you don’t owe anygift tax and don’t file a return.
Published 12:00 am Tuesday, August 22, 2000
Now assume that, years later, after your death, your estate tax return is audited and the IRS questions the value of the stock you transferred to your daughter. The value of prior taxable gifts is brought back into your estatefor the purpose of determining the cumulative tax rate on your estate, so the question of the value of prior gifts and whether they were taxable is a relevant audit subject. Your executor doesn’t have a clue as to how youvalued the stock transfers 20 years earlier. Unless the executor can justifythe valuation, your estate could face added taxes, as well as possible interest and penalties.
How can you avoid these potential financial burdens? By filing a gift-tax return each year you gave your daughter stock in your company and explained how you arrived at your valuation. Once a proper gift-tax return isfiled, the IRS has only three years to question it. After that, you -and yourestate are home free. The IRS can’t look back and question your gift-taxreturns or request more information from your executor.
Another Form of Insurance Filing a gift-tax return each year you make gifts to grandchildren or to a trust that names your grandchildren as beneficiaries is also a good idea, even if the amount of each gift is $10,000 or less and filing a return isn’t required. The reason: Filing can also avoid later questions about theapplication of the generation-skipping transfer tax which is imposed on transfers to persons two or more generations younger than the gift-giver.
Filing a gift-tax return puts the IRS on notice that it must either challenge the valuation within three years or forfeit its rights. Think of filing a gift-tax return as providing peace of mind for your survivors ALAN S. MOORE, who writes this column every Wednesday for L’Observateur,is a financial advisor of Legg Mason Wood Walker, Inc., a diversifiedsecurities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc.
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