Originally, John Doe was a person with an unreported off-shore bank account, who may be subjected to substantial tax penalties for failing to disclose their foreign assets. However, for the last year the John Doe summons (which, essentially goes after people whose identities are unknown and unspecified), has been targeted toward people who failed to disclose gifts to the IRS. (Disclosure is made on Form 709.) Specifically, it has been targeted toward Californians, many of whom likely did not seek attorney advice before executing their deeds.
You may currently give $13,000 per donor, per donee. The exclusion amount has been at least $10,000 per year since the late 90s, and rose steadily until it reached its current level in 2009. Any amounts over that require a gift tax return. For the most part, no tax is actually required with the return; however, the gift decreases the amount you may pass to your heirs tax-free upon death. In other words, the amount you give now decreases how much you can give without a tax when you die. The IRS needs these tax return forms to keep track of how much of an exemption you have for estate tax purposes. As a result, tardy filing is also penalized.
The IRS issued a “John Doe summons” in California, where real estate prices are relatively high, to find people who have transferred real estate to others without selling the property. Often, people will write “gift” in order to avoid a recording transfer tax and then record the document. These documents are public record for the IRS to tap into. If you have already transferred property to your children or grandchildren, especially without any transfer tax paid, you should speak to a tax professional to determine how to disclose your potential gift tax obligation.
If you have been thinking of transferring property to your children or grandchildren, especially to decrease your potential estate tax, there may be estate planning alternatives that can help. Estate tax planning is one of the reasons people “give” their house away. In such cases, a Qualified Personal Residence Trust or other gift for a certain number of years in the property may be an effective tool.
Some other common reasons people give their homes away to their children during life include Medi-Cal planning and Veteran’s Aid & Attendance Non-Service Connected Disability planning. It is a common misconception that individuals seeking to qualify for Medi-Cal or Veterans Aid & Attendance Non Service Connected Disability benefits must rid themselves of their real property in order to qualify. However, there are sound reasons for doing this. Depending on your circumstances, a QMap trust or a QVap trust may solve your dilemma by allowing you to meet the requirements of the program while preserving certain income tax benefits. Remember that a gift tax return is required even if you do not have any estate tax concerns; even if your estate will be under $1 million (assuming that that is the exemption in 2013) with the property, you must make a record of the gift.
Regardless of your reason for transferring real estate, you should always speak to a tax advisor and an estate planning attorney before attempting to make the transfer yourself. Otherwise, you may subject yourself to substantial unforeseen consequences including legal fees, tax penalties, and even public family feuds in court!
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