If you are considering giving gifts as a part of your estate plan, you may be concerned with how taxes may impact your plans. While estate planning can be complex, gift giving is commonly used as a way for individuals to protect their estate and bestow loved ones valuable assets. If done correctly, your heirs may enjoy your gifts without ever having to worry about the IRS questioning their value.
A gift's value may be questioned by the IRS if the gift giver fails to file a gift tax return. Tax law limits the time the IRS can question the valuation of a gift to three years after it's been given. If an adequate gift tax return is filed, the clock begins to run on the statute of limitations. After three years, the IRS can no longer question a gift's valuation, and the gift is considered free and clear of any claims the IRS may have on it.
It is important for individuals to understand that in order for the statute of limitations clock to begin running down, the IRS must accept the gift tax return as true and correct. If the taxpayer does not include adequate disclosure with the gift tax return, the IRS does not have to adhere to the statute of limitations. In some cases, taxpayers are not even made aware that the IRS did not accept their gift tax return.
Elements necessary for adequate disclosure to be present are the gift's appraised value with documentation and an explanation of how it was gifted. If any of these elements are missing or incomplete, the statute of limitations clock does not begin to run.
While gift giving is a common part of many estate plans, it is quite complex and requires the help of a knowledgeable attorney to be done right. To avoid unnecessary issues from creeping up years after the fact, consider speaking to an estate planning attorney.