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Davidow, Davidow, Siegel & Stern, LLP
Long Island's Elder Law, Special Needs & Estate Planning Firm

Friday, June 25, 2004

Gift Splitting

It is a common practice for financial advisors, accountants and attorneys to recommend that their clients gift the "annual exemption" each year as part of the clients' estate, gift and income tax planning. The following is a summary of the rules regarding "gift-splitting" which is an important part of utilizing the annual exemptions.

Generally, each individual is permitted to gift $10,000.00 to any number of donees during a tax year without the requirement of filing a gift tax return and, at the same time, without utilizing the applicable exclusion amount. If a gift from a married individual exceeds $10,000.00 to any one donee, you may consider gift-splitting with their spouse. That is, if the nondonor spouse agrees, the gift can be deemed to have been made from both husband and wife; thereby utilizing the $10,000.00 exemption per spouse, for a combined $20,000.00 gift per donee.

The following are the requirements for gift splitting: Gift-splitting can only be elected between spouses. Gift-splitting is not permitted if the couple is divorced and either of them remarries during the year; the spouses must both be U.S. citizens or residents; and the nondonor spouse must consent to the gift-splitting.

A split gift is recorded on the donor's gift tax return. If only one of the spouses makes gifts during the calendar year, then the nondonor spouse simply consents by signing the donor spouse's gift tax return and will not need to file their own gift tax return (unless the total gifts to the donee exceeds $20,000.00 for the year or any gift constitutes a future interest).

Note that a nondonor spouse may revoke the splitting of gifts on or before the April 15th following the year of the gift. In addition, the gift-splitting election applies to all of the gifts made during the year. As a result, the nondonor spouse cannot elect to split some gifts but not other gifts.

As the end of the year approaches, it is important to advise clients on the basic rules of gift-splitting and the gift tax return requirements so that the gift tax exemptions are not jeopardized.

Friday, June 11, 2004

Proper Beneficiary Designations

We have been discussing the importance of proper beneficiary designations in wills and living trusts. Generally, the most frequent type of designation seen is, assuming no surviving spouse, "to my children, in equal shares, per stirpes." This means that a distribution will be made to the surviving family members when a beneficiary dies before the testator or settlor of a trust. But what about beneficiary designations for non-probate assets such as life insurance, annuities, 401K's and IRA's? The answer is that equal attention must be paid to the beneficiary selection for these types of assets as with wills and trusts. The per stirpes designation on a financial institution's or insurance company's beneficiary designation form is acceptable. Some issues to be aware of include: per stirpes (for example, "to my son, A, per stirpes") may not avoid the appointment of a guardian by a court if a minor does inherit as a contingent or designated beneficiary of a non-probate asset. A simple solution: "To my son, A, per stirpes, but in the event such issue who inherit shall be minor (s) then said minor's beneficiary share shall be paid to a custodian under the Uniform Transfers to Minors Act until the maximum age permitted by law and thereafter directly to the beneficiary. The custodian, if none, shall be designated by the executor or administrator of my estate." If there is no per stirpes or per capita designation on a beneficiary designation form, the proceeds of the policy or retirement account will be payable to the testator's estate, and be distributed according to the terms of his or her will, or by intestacy, if no will exists. This may create unintended results and unintended beneficiaries. If a trust is named the beneficiary of a IRA, and the testator later revokes the trust, care must be taken to change the beneficiary designation form, as well. It is also recommended that a beneficiary designation form be completed in duplicate, with one copy returned to the owner of the account or policy. This avoids the potential problem of a misplaced or lost designation form by a financial institution.