Advanced Underwriting Consultants

Question of the Day – May 7

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Here’s the question of the day.

Question:  I have a client who wants to make a gift of $50,000 to her son.  How much does she need to pay in taxes?

Answer:   A gift of cash to a family member is not generally subject to extra income taxes for either the donor or the done.  Neither is the gift income tax deductible.

Large gifts may be subject to federal or state gift taxes.  The federal government allows a donor to make gifts of up to $14,000 in a calendar year to each prospective done without any gift tax consequences.  These types of gifts are referred to as annual exclusion gifts.  An annual exclusion gift requires no extra paperwork or tax filing by the donor.

If a donor wants to make gifts in excess of annual exclusion gifts, the donor can choose to use some or all of his or her lifetime exemption.  A taxpayer in 2013 has a $5.25 million lifetime exemption.  The taxpayer uses the lifetime exemption to shelter gifts that would otherwise be subject to gift taxes from those taxes.  Any part of the exemption used to shelter gifts during lifetime reduces the amount of the exemption available against federal estate taxes at death.

The taxpayer is required to file a federal gift tax return for gifts that use up part of the lifetime gift tax exemption.  Gifts in excess of the lifetime exemption amount are subject to federal gift taxes at a flat rate of 40%.

In the example described above, the donor’s first $14,000 of gift to her son would qualify for the annual gift tax exclusion.  The other $36,000 of the gift would require her to file a gift tax return, and use up part of her lifetime exemption.

Until recently, Connecticut and Tennessee were the only two states that imposed a gift tax on large gifts made by residents.  However, Tennessee recently repealed its state gift tax.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – August 31

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My client wants to loan money to his son at a low interest rate so that the son can start a business.  Does that transaction have any gift tax consequences?

Answer:  The bad news is that the IRS says that a family loan has gift tax consequences if no interest is charged.  The good news is that these days charging a low amount of interest for the family loan could be enough.

How much interest is enough?  It depends on how long the loan’s term is for.  For example, if the loan must be paid back in five years, the IRS says that its mid-term rate is the minimum loan interest rate that must be used.

The IRS publishes interest rates every month.  The mid-term rate for September of 2012 is .84%–less than 1% per year.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – July 3

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Can you explain how Tennessee has recently changed its gift and inheritance tax structure?

Answer: On Monday, May 21, 2012, Tennessee Governor Bill Haslam signed into law two bills that changed Tennessee gift and inheritance taxes.

The first bill repeals the Tennessee gift tax.  Tennessee was one of the last states to retain a stand-alone gift tax.  Prior to the passage of the repeal, Tennessee imposed a tax at the graduated rate of 5.5% to 16% on gifts from one individual to another in excess of $13,000 in any calendar year.  The repeal is effective for gifts made on or after January 1, 2012.

Connecticut is now the only state remaining that imposes a state gift tax.

The second bill phases out the Tennessee inheritance tax.  This tax is currently imposed on decedent’s estates that exceed the maximum single inheritance tax exemption amount ($1 million in 2012) at a graduated rate from 5.5% – 9.5% for Class A beneficiaries.  The new law increases the maximum allowable inheritance tax exemption amount from $1 million to $1.25 million for those dying in 2013; to $2 million for those dying in 2014, and to $5 million for those dying in 2015. For those dying in 2016 and thereafter, no inheritance tax will be levied.

The changes in the law, coupled with the current federal gift tax and estate tax lifetime exemption of $5.12 million, bring new gifting and estate planning opportunities to Tennessee residents beginning in 2012.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – April 23

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My 80 year old client has put her 50 year old son on as a joint tenant with right of survivorship (JTWROS) on her brokerage account.  What are the gift tax and income tax consequences of that transaction?

Answer: There probably aren’t any results right now.

The income and gift tax consequences related to a nonqualified brokerage account owned jointly depends on who put the money in.  In general, if the parties are not married, the ownership of the account for tax purposes stays with the donor.  In the situation described above, Mom put in all the money.  Mom still is considered to be the owner the account from an income and gift tax perspective.

If the current brokerage custodian accepts just one signature for withdrawals, Mom should be able to get the money out without gift tax or administrative issues.  If part of the account needs to be liquidated, Mom will recognize an income tax result when the underlying securities are sold.

On the other hand, if Son gets a cash distribution from the account, that will be considered to be a gift taxable distribution from Mom to Son.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – November 14

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Here’s the Question of the Day

Question: Is there a compelling reason for the owner of a closely held business to use money from the business to pay for life insurance needed to pay estate taxes?

Answer: Maybe.

There are usually few, if any, income tax reasons to have the 100% owner of a closely held business use business money to pay for needed life insurance.  However, there may be compelling gift tax reasons to do so.

When life insurance is used to pay for estate taxes, the coverage is usually owned by an irrevocable trust (ILIT), or, in the alternative, adult children.  If the insured transfers money to the ILIT or adult children by gift, the insured must deal with the gift tax limitations imposed by the federal and relevant state governments.

If the insured is worried about gift tax limits, it may be possible to access money from the business in different ways to provide the money needed for the premium:

1. A split dollar plan between the business and the ILIT may lower the gift tax cost of the premium.

2. If the adult children are employees of the business, the business may pay them extra to cover the premiums associated with the life insurance policy.

3. The business may be able to lend money to the ILIT or adult children to provide the premium needed for the coverage.

Each of these alternatives may lower or eliminate the gift tax cost associated with the insurance meant to pay the insured’s estate taxes.  However, each alternative has its drawbacks.  Talk with the proposed insured’s estate planning attorney and accountant to decide whether one of these might be the right choice.

Question of the Day – October 24

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Here’s the question of the day.

Question: How is a life insurance policy valued for gift tax purposes?

Answer: Treasury Regulations Section 25.2512-6 explains specifically how life policies are to be valued for gift tax purposes:

(W)hen the gift is of a contract which has been in force for some time and on which further premium payments are to be made, the value may be approximated by adding to the interpolated terminal reserve at the date of the gift the proportionate part of the gross premium last paid before the date of the gift which covers the period extending beyond that date. (Emphasis added.)

The gift tax valuation of a life policy is sometimes given the short-hand description of interpolated terminal reserve plus unearned premium.  It is difficult, if not impossible, for a non-actuary to calculate interpolated terminal reserve (ITR).

The regulations make clear that under the following circumstances different gift tax valuation methods are appropriate:

  1. When the transfer of the contract is close to the time it was purchased, the value is the contract’s purchase price.

2. When the policy is paid-up, its value is the cost of a paid-up policy for someone the same age as the insured’s current age.

3. Where a policy has accrued dividends or outstanding indebtedness, the ITR value should be adjusted for such dividends or indebtedness.

4. If there is something unusual about the policy or the circumstances that would make a different valuation method appropriate, neither the ITR method nor any other method listed above may be used.

When a policy owner needs to get a gift tax value for a life policy, he or she should work with the life agent to get a calculation of ITR from the life company.  After that, the client should work with his or her tax professional to decide which valuation method is most appropriate for the gift tax transfer of the policy.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.