As we approach the end of 2012, and with the holidays upon us, many Americans will be giving gifts in December by way of a check. This year is unique because the Fiscal Cliff is also upon us. Some people will be writing very large, multimillion-dollar checks to family members with the hopes of taking advantage of favorable tax conditions in advance of the Fiscal Cliff. Those taxpayers may become victims of their own generosity.
A gift — via check — to a family member is merely a promise to pay. It is not in itself a payment. The IRS has several rules governing the effects of checks when determining their implication on estate and gift tax exposure. Perhaps the most important rule to note in 2012, however, is that the check must be deposited, cashed or presented in 2012 for it to apply toward the 2012 gifting rules.
So what does this mean? There is a $5.12 million lifetime gift exemption in 2012. That exemption expires as part of the Fiscal Cliff and is scheduled to be reduced to $1 million in 2013. If you present a check to a child for $5.12 million on Christmas Day, December 25, 2012, and the child deposits the check on December 28, you will have taken advantage of the gift exemption and no tax should be due. However if your child receives the check but does not make it to the bank until January 2, 2013, the gift will count as a 2013 gift resulting in a gift tax of approximately $2.3 million. To make matters worse, gift taxes are paid by you or your client — the gift giver — and not the gift recipient.
If you’ve waited for the waning moments of 2012 to make a large gift and plan to make that gift by way of a check, make sure that check gets deposited or cashed before January 1. If you’re going to make that big gift, consider adding to your generosity by offering the recipient a ride to the bank, too. You’ll probably sleep a lot better on New Year’s Eve.
Eido Walny is an estate and asset protection attorney and the owner of Walny Legal Group LLC, based in Fox Point.