H2R CPA Blog
Tax Reform Resource Center
by H2R CPA Team
Have you made substantial gifts of wealth to family members? Or are you the executor of the estate of a loved one who died recently? If so, you need to know whether you must file a gift or estate tax return.
Filing a gift tax return
Generally, a federal gift tax return (Form 709) is required if you make gifts to or for someone during the year (with certain exceptions, such as gifts to U.S. citizen spouses) that exceed the annual gift tax exclusion ($15,000 for 2018 and 2019); there’s a separate exclusion for gifts to a noncitizen spouse ($152,000 for 2018 and $155,000 for 2019).
Also, if you make gifts of future interests, even if they’re less than the annual exclusion amount, a gift tax return is required. Finally, if you split gifts with your spouse, regardless of amount, you must file a gift tax return.
The return is due by April 15 of the year after you make the gift, so the deadline for 2018 gifts is coming up soon. But the deadline can be extended to October 15.
Being required to file a form doesn’t necessarily mean you owe gift tax. You’ll owe tax only if you’ve already exhausted your lifetime gift and estate tax exemption ($11.18 million for 2018 and $11.40 million for 2019).
Filing an estate tax return
If required, a federal estate tax return (Form 706) is due nine months after the date of death. Executors can seek an extension of the filing deadline, an extension of the time to pay, or both, by filing Form 4768. Keep in mind that the form provides for an automatic six-month extension of the filing deadline, but that extending the time to pay (up to one year at a time) is at the IRS’s discretion. Executors can file additional requests to extend the filing deadline “for cause” or to obtain additional one-year extensions of time to pay.
Generally, Form 706 is required only if the deceased’s gross estate plus adjusted taxable gifts exceeds the exemption. But a return is required even if there’s no estate tax liability after taking all applicable deductions and credits.
Even if an estate tax return isn’t required, executors may need to file one to preserve a surviving spouse’s portability election. Portability allows a surviving spouse to take advantage of a deceased spouse’s unused estate tax exemption amount, but it’s not automatic. To take advantage of portability, the deceased’s executor must make an election on a timely filed estate tax return that computes the unused exemption amount.
Preparing an estate tax return can be a time consuming, costly undertaking, so executors should analyze the relative costs and benefits of a portability election. Generally, filing an estate tax return is advisable only if there’s a reasonable probability that the surviving spouse will exhaust his or her own exemption amount.
Seek professional help
Estate tax rules and regulations can be complicated. If you need help determining whether a gift or estate tax return needs to be filed, or help with overall estate planning, contact H2R CPA at 412-391-2920 or email@example.com.
by H2R CPA Team
Employee stock ownership plans (ESOPs) offer closely held business owners an exit strategy and a tax-efficient technique for sharing equity with employees. But did you know that an ESOP can be a powerful estate planning tool? It can help you address several planning challenges, including lack of liquidity and the need to provide for children outside the business.
An ESOP in action
An ESOP is a qualified retirement plan, similar to a 401(k) plan. But instead of investing in a selection of stocks, bonds and mutual funds, an ESOP invests primarily in the company’s own stock. ESOPs are subject to the same rules and restrictions as qualified plans, including contribution limits and minimum coverage requirements.
Typically, companies make tax-deductible cash contributions to the ESOP, which uses the funds to acquire stock from the current owners. This doesn’t necessarily mean giving up control, though. The owners’ shares are held in a trust, and the trustees vote the shares.
An ESOP’s earnings are tax-deferred: Participants don’t recognize taxable income until they receive benefits — in the form of stock or cash — when they leave the company, die or become disabled.
Retirement and estate planning benefits
If a large portion of your wealth is tied up in a closely held business, lack of liquidity can create challenges as you approach retirement. Short of selling the business, how do you fund your retirement and provide for your family?
An ESOP may provide a solution. By selling some or all of your shares to an ESOP, you convert your shares into liquid assets. Plus, if the ESOP owns 30% or more of the company’s outstanding common stock immediately after the sale, and certain other requirements are met, you can defer or even eliminate capital gains taxes. How? By reinvesting the proceeds in qualified replacement property (QRP) — which includes most securities issued by U.S. public companies — within one year.
QRP provides a source of retirement income and allows you to defer your gain until you sell or otherwise dispose of the QRP. From an estate planning perspective, a simple but effective strategy is to hold the QRP for life. Your heirs receive a stepped-up basis in the assets, eliminating capital gains permanently.
If you want more investment flexibility, you can pay the capital gains tax upfront and invest the proceeds as you see fit. Or you can invest the proceeds in qualifying floating-rate long-term bonds as QRP. You avoid capital gains, but can borrow against the bonds and invest the loan proceeds in other assets.
If estate taxes are a concern, you can remove QRP from your estate, without triggering capital gains, by giving it to your children or other family members. These gifts may be subject to gift and generation-skipping transfer taxes, but you can minimize those taxes using traditional estate planning tools.
Weigh the pros and cons
ESOPs offer significant benefits, but they aren’t without their disadvantages.
Contact H2R CPA at 412-391-2920 or firstname.lastname@example.org to determine if an ESOP is right for you or if you have any questions about estate planning or tax planning.
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