We all would agree that it is poor form to ask that a gift be given back, right? To make matters worse, it is not a simple matter from a tax/legal perspective either.
Even the best laid plans may not have survived the recent lame duck Congress (surprise?) and, as Deborah Jacobs of Forbes reports, many are finding themselves in a position of giver’s remorse rather than buyer’s remorse this January, and not just over Christmas presents.
Here's the deal: Before Congress put through the new tax law, the gift tax rate was set to revert to 55% in 2011 up from the 35% in 2010. Accordingly, on that basis it was a solid strategy to leverage your lifetime limit (i.e., $1 million) while the tax was so low (indeed, I’ve referenced articles with this advice in previous posts). Of course, now that the gift tax rate didn’t revert back up or increase at all there seems to have been little advantage to that plan. Hmmm. Some 2010 generous givers now would like to undo their generosity before the April 15th tax deadline. Unfortunately, as Jacob’s article points out, that is easier said than done -- without risking tax fraud.
The gift can be undone in a quick fix by a "disclaimer" on the part of the recipient. In that case, the assets return to the donor, as long as the disclaimer complies with all of the attendant rules. But, it's not that simple. For instance, if the gift was to a trust rather than an individual, there may be impediments imposed by state law. Also, there’s the issue of timing, since the gift must be disclaimed within nine months (although this probably isn't an issue if the gift was made late in the year). Finally, for the gift to be disclaimed the recipient must still have it, as one would expect, but they also must not have accepted an interest in the asset or any of its benefits. As you can see, the lines are hazy. To make matters even more complicated, the rules vary from state to state and depend on the nature of the gifted asset.
Unfortunately, given all of these restrictions it is going to be difficult to undo the gift. Indeed, it can’t simply be given back either, since that makes the original recipient liable for the gift tax as well (two gifts don’t undo a tax). Bottom line: If the gift can be undone, it must be undone correctly. Don't try this at home. Make sure you engage competent legal and tax counsel before your leap.