GIFT TAX LIABILITY
Gift tax liability and estate planning sometimes intersect. The tax Court case of Steinberg v. Commissioner, 141 T.C. No. 8 (Sept. 30, 2013) deals with an interesting issue, if tax law can ever be interesting, where gift tax liability and estate tax liability intersect. It is important to note that the opinion deals with gift tax liability and how to measure gift tax liability, it nonetheless deals with some important estate tax implications. In 2007, Ms. Jean Steinberg gifted approximately $71,000,000 in cash and securities to her four daughters. In exchange, the daughters agreed to pay the gift taxes as well as the estate tax on the transfer should Ms. Steinberg pass away within three years of the gift transfer. An appraiser valued that the daughters assumed approximately $6,000,000 in tax liability for the estate taxes alone. When Ms. Steinberg filed her tax return, the IRS disagreed with the $6,000,000 write off, as the daughter’s assumption of estate tax liability did not increase the value of the estate. The Internal Revenue Service (IRS) claimed that Ms. Steinberg owed an additional approximately $2,000,000 in taxes and mailed her a notice of deficiency.
ESTATE TAX LIABILITY
Under 26 U.S.C. § 2035 the value of an estate increases by the amount of any gift tax paid by the decedent or the estate on any gift made by the decedent in the three year period of time prior to the death. When the recipient pays the tax on their gift, tax liability is affected, since the donor receives the value of the tax liability from the recipient. Gift tax liability is determined by the value of the transfer from the donor, not the value to the recipient. As such, in the case at hand, when the recipients paid the gift tax for the donor, they escaped the increase in the value of the estate as required by 26 U.S.C. § 2035.
The lesson that you should take away from the case is that decisions motivated by altruism and generosity, decisions that do not take into account tax law implications, such as giving a gift to your loved ones prior to you passing away, may have dramatic estate tax implications. While the case deals with issues other than what is being fleshed out here, it is still provides an important illustration point for estate law issues. If, as in the Steinberg case, the issue is a future payment of taxes, how does one measure that in present time? What if the future payment of taxes is based on a triggering event and the triggering event never occurs? What if the person who agreed to pay the future tax passes away prior to the triggering event? All of the contingencies can be planned for and addressed, but the key to dealing with them is foresight and deliberation.
The transmission of your wealth after you pass away should be treated with the same amount of planning that you put into it building it. Nobody but an experienced estate law attorney attorney should be trusted for this important issue.