Under the Table

By Blake W. Kirkpatrick

Under the Table Dogs must be a gift from God. Generally speaking, they love you unconditionally. They are loyal and always seem happy to greet you. In many cases, they will protect you from harm. They seem to have incredibly short term memories. They are often ignored until we need them or desire their companionship. They also seem to make good gift planning analogies too.

The phrase “under the table” invokes thoughts of something hidden, done in secret or, perhaps even dishonesty. From an opportunistic dog’s perspective, it probably invokes thoughts of a free meal.

At my house, the general rule is: Don’t feed the dog from the dinner table. However, you can probably guess that this rule leads to little gifts “under the table” to the dog. Here are a few plausible reasons why this happens:
1) No one really likes the rule as much as they really love the dog
2) Puppy dog eyes (i.e., “just look at him, he’s starving”)
3) We probably feel a little bit guilty about ignoring the dog throughout the day
4) You mean I have to get up from the dinner table and put the food in his dinner bowl instead? That just seems ridiculous.
5) What harm is it really if we give a little “under the table” when no one is looking?

So what does the above have to do with gift planning or gift tax? Well, humans seem to have become pretty good at making gifts “under the table” to other humans as well (typically children and grandchildren). In short, most gifts go unreported. In fact, even Congress and the IRS have conceded a little on this point.

Currently, the Internal Revenue Code grants an annual exclusion for gifts of $14,000 per person, per donee. That amount is indexed to inflation each year. Generally, gifts totaling less than this amount to an individual do not have to be reported.

If you make gifts (cumulative) in excess of $14,000 during the calendar year to a particular person (or $28,000 assuming you and your spouse have joined in the gift), the gifts are required to be reported on a gift tax return. If the gift is of something that requires an appraisal to determine value (like real estate or a closely held stock) then a return should also be filed  (even if the amount is less than the threshold because value can be challenged). However, most people would prefer not to go through the hassle of keeping track of and reporting such transfers. Further, under the current law, unless one has used his or  her entire lifetime exemption from gift tax ($5,340,000 as of 2014), he or she probably will never write a check to the IRS to pay gift tax anyway.

So, what’s the harm and why should someone plan? First, a rule is being broken for failure to report (e.g., don’t feed the dog from the dinner table). While that should be the primary focus of the discussion, let’s look at the other ramifications of making “under the table” gifts.

Gift of a remainder interest in property while retaining a life estate
Giving away a remainder interest while retaining a life estate in property is still a gift and the transaction is reportable for gift tax purposes even though the property will be included in your estate for estate tax purposes at your death because you retained the life estate. Further, should you desire to transfer the property in the future, it will require the approval of the remainder interest holders. One might get around the “approval issue” by making sure that the life estate deed is structured in a way to retain such control (known as a “Lady Bird deed”). However, the estate and gift tax issues are still present.

Taking title with (or transferring title to) someone as joint tenants with right of survivorship
Transfers by gift to create joint tenants with right of survivorship in a child or other person may seem like a good idea at the time (i.e., property will simply transfer at death to the survivor without probate). However, by doing so you have made an irrevocable gift of at least 50% of the property (reportable on a gift tax return, depending upon the value of the property/gift) and again, because there is still the retention of an interest in the property, the property would be includable in the donor’s estate, irrespective of the gift. Further, the creditors of either joint owner may be able to obtain an interest or force the sale/partition of the property in order to have their judgment satisfied. “If you lie down with a dog, you may get up with fleas.”

“Loans”
A “loan” to someone with no real expectation of repayment or consummated with little or no documentation or security, may very well be treated as a gift. There can be other negative income tax consequences as well. In some cases, such loans can be treated as gifts (for transfer tax purposes), while income can be imputed to the lender (i.e. parent). It is generally in the latter context where penalty and interest for failure to pay tax can arise.

Down Payments for Businesses/Residences
Large unreported gifts given to individuals for down payments on residences and/or businesses for the most part seem innocuous on the surface. Nevertheless, the donor tends to regret making the gift once the donee goes through a divorce or the business fails. Since there is no documentation other than a gratuitous check or deposit into the donee’s bank account, the donor has little remedy available to get the money back. There can be negative tax consequences to each type of transaction as well. Carefully structuring such transactions, can lead to better tax results, better protection and general accountability.

Cash Gifts vs. Payments for Medical/
Educational Expenses
A little-known fact is that gifts of cash given directly to an individual count towards the annual exclusion and/or lifetime exemption amounts expressed above (even if the recipient turns around and pays a tuition or medical bill). However, if such payments made are directly to educational institutions, medical facilities, etc., they do not count towards the amounts that you can give to a person based on annual exclusion or lifetime exemption. A little planning goes a long way.

Detrimental Reliance
Last, and probably the most common, is the enabling behavior that under the table gifts tend to create. As soon as the gift is made, it can be forgotten. This may be especially true for dogs with big appetites or children with large spending budgets. I happen to think my wife is great cook, so the dog doesn’t receive too many under the table treats.   My dog doesn’t appreciate the food anyway, because whatever he does eat is gone in a matter of milliseconds.  Nevertheless, you can find him under the table at every meal.

In summary, as we approach the season for making gifts, you should carefully consider seeking advice from a tax and/or legal advisor prior to making any significant gift, loan or transfer. In short, engaging in such transactions above board is not only the right thing to do, but in the long-run is likely in your best interest as well. Plus, the dog (and hopefully your children) will love you anyway.

Blake W. Kirkpatrick
Blake W. Kirkpatrick is a Florida Bar Board Certified Wills, Trust & Estates attorney with the law firm of Salvatori, Wood, Buckel, Carmichael and Lottes.  Blake’s practice is concentrated in the areas of estate and tax  planning, charitable planning, business succession planning, and estate and trust administration.

Salvatori, Wood, Buckel, Carmichael & Lottes
239.552.4100 | www.swbcl.com