Wealth Management Group Newsletter – Summer 2019
Eileen Cozzi, Jeffrey R. Green

Filing a Gift Tax Return for Non-Gifts Can Be the Best Insurance Against Unpleasant Tax Surprises Down The Road


Did you know that it may be advantageous to file a gift tax return when transferring property to, or for the benefit of, a family member even when a gift tax return is not required?  Transfers such as a sale to a family member or to a grantor trust, where the value of the item sold could be in dispute, are non-gifts that should be reported on a gift tax return.  If a gift tax return is filed that meets the IRS’ “adequate disclosure” requirements, the three-year statute of limitations clock starts.

Avoiding future tax surprises

Generally, the IRS has three years after a gift tax return is filed to challenge the value of a transaction for gift tax purposes or to assert that a non-gift was, in fact, a partial gift. However, there is no statute of limitations barring assessment if no gift tax return is filed, if the gift tax return is false or fraudulent, or if the gifts and non-gifts are not adequately disclosed on the gift tax return. That means the IRS can collect unpaid gift taxes, plus penalties and interest, years or even decades later.

Define adequate disclosure

If you file a gift tax return that meets the adequate disclosure requirements, the IRS has only three years in which to challenge the valuation. To fulfill these requirements a return must include:

  1. A description of the transferred property and any consideration received;
  2. The identity of, and relationship between, the transferor and each transferee;
  3. The trust’s tax identification number and a brief description of its terms (or a copy of the trust instrument) if property is transferred to a trust;
  4. Either a detailed description of the method used to value the transferred property or a qualified appraisal (see “Benefits of a Qualified Appraisal” below); and
  5. A statement describing any position taken that is contrary to any proposed, temporary or final tax regulations or revenue rulings published at the time of the transfer.

However, for non-gifts

For non-gifts, adequate disclosure also requires the gift tax return to include an explanation as to why the transfer is not a transfer by gift under the Internal Revenue Code. However, it does not require a detailed description of the method used to value the transferred property or a qualified appraisal. But, in order to adequately explain why a transfer is not a gift, there should be support that the consideration paid was equal to fair market value of the property transferred. Therefore, even though it is not required, the gift tax return should include a detailed description of the method used to value the transferred property or a qualified appraisal.

Additional disclosure for transfers subject to the special valuation rules of Chapter 14

Transfers subject to the special valuation rules of Chapter 14, such as Grantor Retained Annuity Trusts (GRATs)—including zero gift GRATs— and Qualified Personal Residence Trusts (QPRTs), have the following additional disclosures requirements:

  1. A description of the transferred and retained interests and the methods used to value each;
  2. The identity of, and relationship between, the transferor, transferee, all other persons participating in the transactions and all parties related to the transferor holding an equity interest in any entity involved in the transaction; and
  3. A detailed description (including all actuarial factors and discount rates used) of the method used to determine the amount of the gift (if any) including, for equity interests that are not actively traded, the financial and other data used to determine value.

Benefits of a qualified appraisal

Obtaining an independent appraisal offers significant benefits, particularly for difficult-to-value property, such as interests in closely held businesses. An appraisal by a qualified appraiser helps ensure that the gift tax return contains all valuation information necessary to satisfy the adequate disclosure rules. Plus, if the appraisal is conducted at or near the time of the transfer, it will go a long way toward persuading the IRS that the original valuation of the property was accurate.

Speak to your advisor

You may be reluctant to file gift tax returns disclosing non-gift transactions for fear of drawing the IRS’ attention.  However, in some cases, it is advisable to file a timely gift tax return that satisfies the adequate disclosure requirements. Contact your estate planning advisor for more information.

For more information contact Eileen Cozzi at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Group.

© 2019

Tax Tips


Why your college-age child needs an estate plan

Most college packing lists do not include an estate plan; however, a few basic documents can give you peace of mind as your son or daughter heads off to college. Without them, once your child turns 18, you will lose the right to access financial or medical information or make decisions on his or her behalf. Recommended documents include:

  • A HIPAA authorization and health care power of attorney, giving you access to medical information and the ability to make medical decisions if your child is unable to do so; and
  • A financial power of attorney, authorizing you to access your child’s financial records and handle financial matters while he or she is away from home.

Generally, a will is not necessary unless your child owns a significant amount of property.

Behind on your retirement savings? Consider a cash balance plan

Business owners looking for ways to boost their retirement savings should consider a cash balance plan. One problem with 401(k) and other defined contribution plans is that nondiscrimination rules prevent business owners from favoring themselves over rank-and-file employees when it comes to contributions.

A cash balance plan, although it looks and feels much like a defined contribution plan, is actually a defined benefit plan. Thus, to comply with nondiscrimination rules, benefits paid to highly compensated employees (HCEs) and non-HCEs must be comparable. As long as projected benefits do not discriminate, contributions may be as high as necessary to fund those benefits. Often, that means dramatically higher contributions for owners approaching retirement than for younger employees.

Have you inadvertently disinherited your spouse?

Now that the federal gift and estate tax exemption has reached $11.40 million ($22.8 million for married couples), review your estate planning documents for provisions that can produce unintended results, and amend them if necessary. It is not unusual, especially in older plans, for a “formula-funding clause” which generally funds a credit shelter trust with the greatest amount of property that may pass to others free of federal estate tax, with the balance going to a marital trust or directly to one’s surviving spouse. This approach may have worked well in the past, if the value of your estate exceeded the exemption amount. But if that is no longer the case, a formula-funding clause can cause all your property to go into the credit shelter trust, effectively disinheriting your spouse.

Be aware that the Tax Cuts and Jobs Act is set to expire after 2025, which at that point, the estate tax exemption will return to an inflation-adjusted $5 million for 2026. This will cause even the best planned estates to be revisited when that time comes.

Is it time to revisit your Qualified Personal Residence Trust?

If you transferred your home to a qualified personal residence trust (QPRT) years ago, the estate tax savings you envisioned may not be relevant today with the increase in the estate tax exemption. If estate taxes are no longer a concern, talk to your tax advisor about unwinding the QPRT. One possible option is to continue living in the home rent-free after the trust term. This would pull the home back into your estate, entitling it to a stepped-up basis and relieving your heirs from capital gains taxes on the home’s appreciation.  However, by unwinding the QPRT, you will have wasted any payment of federal gift tax or use of the applicable exclusion amount associated with the original transaction.

For more information, contact Jeffrey Green at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.


Forward Thinking