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Elderly woman beats tax court on gifting arrangement, P.1

Gifting can be an important aspect in estate planning, particularly for the wealthy who are trying to get their estate to fall within the estate tax exemption amount. Gifting isn’t as simple as giving assets away, though. Because of gift tax, there are limits on how much an individual can gift on a yearly basis, and in total, before incurring gift tax. Because of this, gifting should be planned out.

One of the rules with gifting is that the IRS will add the value of any gifts made within three years of a giver’s death to their estate, which increases the value of the estate and the taxes imposed. The purpose behind the rule is to discourage people from giving away a bunch of property right before they die in order to avoid estate taxes. There aren’t really any ways to get around the rule, but an interesting case decided earlier this month by the U.S. Tax Court highlights a scenario in which an elderly woman attempted to get around the rule, and won. 

The elderly woman, 89-year-old Jean Steinberg, devised a plan in which she gave her daughters a $72 million gift of cash and securities, with the understanding that they would be responsible for any gift or estate taxes that would result if she passed away within three years of the gift, in order to avoid having her estate pay the full rate on the amount. The value of their gift was to be reduced by the amount that would revert back to her estate in the event of her death. Further, if the daughters did not pay the taxes, they would not be eligible for further distributions. The daughters agreed to all this.

In our next post, we’ll continue looking at this story. 

Source: LifeHealthPRO, “How one family fought the IRS on estate taxes—and won,” Tom Nawrocki, October 17, 2013. 

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