In 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. One of the major provisions of the Heart Act was to collect substantial taxes from certain United States taxpayers (whether a citizen or a permanent resident alien) who expatriated from the United States after June 16, 2008. The individuals that this law applies to are known as "Covered Expatriates."
There can be harsh federal income tax and federal inheritance tax consequences if you are deemed to be a Covered Expatriate.
A person is considered a Covered Expatriate if he or she:
1) is a US citizen who renounced his or her citizenship OR a permanent resident alien who relinquishes his or her status after being a permanent resident alien for 8 of the last 15 years; AND
2) has had an average annual net income tax of more than $124,000 ($136,000 adjusted for inflation) in the preceding five years OR has a net worth equal to or more than $2,000,000 OR such person fails to certify, under penalty of perjury, that he or she has met the income and asset requirements.
Additionally, this statute does not apply to dual citizens who became a citizen of the United States by birth, but have never had substantial contacts with the United States. A person is considered to have substantial contact with the United States if he or she was ever a resident of the United States, ever held a passport OR was present in the United States for more than 30 days during any calendar year 10 years prior to the person giving up their United States citizenship. There is a slight variation on this rule for dual citizens who give up their US citizenship prior to age 18 and 1/2.
To learn more about who is a Covered Expatriate, wee Internal Revenue Code Section 2801 and Section 877A(g)(1).
Friday, April 9, 2010
Income Tax Consequences of Expatration
In this down economy, many companies are laying off employees. While this could be deeply troubling for those who get laid off, imagine if you were also subject to a huge income tax penalty as a result. This could be happening to you now if you are a permanent resident alien who decides to leave America after losing your job.
In 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. This ironically named Act was designed to prevent wealthy people from leaving the United States before paying what Uncle Sam thinks they owed.
The Heart Act applies to citizens and permanent resident aliens who meet certain income and asset requirements. These individuals are known as "Covered Expatriates". To see who exactly Covered Expatriates are, read here.
The Heart Act created Section 877A of the Code. Section 877A takes a snapshot of your assets the day before you expatriate. Then, on the day you expatriate, you are then immediately taxed on the net built in gain which is in excess of $600,000 (indexed for inflation - so this amount is $627,000 in 2010). So, if you are a Covered Expatriate and own several real estate properties with built in gain of $1,000,000, there would be a deemed gain of $363,000, and you would have to pay a tax on that gain.
In the case of an IRA, but not most other retirement accounts, expatriates are also deemed to have received a distribution equal to their entire interest. Luckily, there is no early distribution penalty unless you actually do take the money out early. For most qualified and non-qualified retirement accounts, the IRS will continue their existing practice of requiring the employer to withhold 30% when the money is actually distributed from the account.
Perhaps the only positive feature of this law for those affected is that it does allow certain taxpayers to defer making payments on their tax obligations.
Note: There is an open question about whether Section 121 of the Code, which allows a capital gains tax exclusion on sale of primary residence, still applies to Covered Expatriates. It would probably be advisable to sell your primary residence before expatriating to avoid this issue and also to avoid having to obtain a valuation report for the property.
In 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. This ironically named Act was designed to prevent wealthy people from leaving the United States before paying what Uncle Sam thinks they owed.
The Heart Act applies to citizens and permanent resident aliens who meet certain income and asset requirements. These individuals are known as "Covered Expatriates". To see who exactly Covered Expatriates are, read here.
The Heart Act created Section 877A of the Code. Section 877A takes a snapshot of your assets the day before you expatriate. Then, on the day you expatriate, you are then immediately taxed on the net built in gain which is in excess of $600,000 (indexed for inflation - so this amount is $627,000 in 2010). So, if you are a Covered Expatriate and own several real estate properties with built in gain of $1,000,000, there would be a deemed gain of $363,000, and you would have to pay a tax on that gain.
In the case of an IRA, but not most other retirement accounts, expatriates are also deemed to have received a distribution equal to their entire interest. Luckily, there is no early distribution penalty unless you actually do take the money out early. For most qualified and non-qualified retirement accounts, the IRS will continue their existing practice of requiring the employer to withhold 30% when the money is actually distributed from the account.
Perhaps the only positive feature of this law for those affected is that it does allow certain taxpayers to defer making payments on their tax obligations.
Note: There is an open question about whether Section 121 of the Code, which allows a capital gains tax exclusion on sale of primary residence, still applies to Covered Expatriates. It would probably be advisable to sell your primary residence before expatriating to avoid this issue and also to avoid having to obtain a valuation report for the property.
Is there a Federal Inheritance Tax?
It's true. Most people think that the United States only has a federal estate tax (and yes, I know that technically there is no federal estate tax this year). However, the United States also has an inheritance tax that taxes certain inheritances that are received by United States citizens and permanent resident aliens if the inheritance came from a "Covered Expatriate". To see who exactly a Covered Expatriate is, see my article here.
Moreover, the inheritance tax can be an extremely expensive tax as it is taxed at the highest federal gift or estate tax rate. Currently the highest rate is 35%, but this could potentially go as high as 50% after 2010. Unlike the estate tax, which has a large exemption amount (i.e. you can pass on a lot of money before the tax hits), the inheritance tax exemption amount is minimal. You can only pass on an amount equal to the maximum amount that a person can gift annually under Section 2503(b) of the Internal Revenue Code, currently $13,000.
The federal inheritance tax became law when the Heart Act was passed in 2008. The Heart Act created Section 2801 of the Internal Revenue Code to try to collect a tax on the inheritance that United States persons received from wealthy relatives who had fled the United States for tax avoidance reasons.
Since this is an inheritance tax, the tax is paid by the recipient, not the estate. This was done for jurisdictional reasons. It should be noted, however, that the recipient of the inheritance can receive a credit if an estate or inheritance tax was paid in another jurisdiction.
Spouses and charities are specifically exempt from paying this tax, so this tax is mainly going to apply to the children of wealthy parents who have expatriated from America. Due to the number of permanent resident aliens who are returning to their native country in this economy, and leaving adult children in America, it may actually affect a lot of people.
It should be noted that you can not simply get around this tax by giving money to a trust (foreign or domestic). Moreover, indirect gifts and bequests will also be taxed. It is a far reaching act that can also have massive income tax repercussions. To see more about this, read Income Tax Consequences of Expatriation.
If you are thinking about expatriating from the United States, there is some planning that can be done to avoid being treated as a Covered Person. At a minimum, there is planning that you can do to lessen the tax burden.
Moreover, the inheritance tax can be an extremely expensive tax as it is taxed at the highest federal gift or estate tax rate. Currently the highest rate is 35%, but this could potentially go as high as 50% after 2010. Unlike the estate tax, which has a large exemption amount (i.e. you can pass on a lot of money before the tax hits), the inheritance tax exemption amount is minimal. You can only pass on an amount equal to the maximum amount that a person can gift annually under Section 2503(b) of the Internal Revenue Code, currently $13,000.
The federal inheritance tax became law when the Heart Act was passed in 2008. The Heart Act created Section 2801 of the Internal Revenue Code to try to collect a tax on the inheritance that United States persons received from wealthy relatives who had fled the United States for tax avoidance reasons.
Since this is an inheritance tax, the tax is paid by the recipient, not the estate. This was done for jurisdictional reasons. It should be noted, however, that the recipient of the inheritance can receive a credit if an estate or inheritance tax was paid in another jurisdiction.
Spouses and charities are specifically exempt from paying this tax, so this tax is mainly going to apply to the children of wealthy parents who have expatriated from America. Due to the number of permanent resident aliens who are returning to their native country in this economy, and leaving adult children in America, it may actually affect a lot of people.
It should be noted that you can not simply get around this tax by giving money to a trust (foreign or domestic). Moreover, indirect gifts and bequests will also be taxed. It is a far reaching act that can also have massive income tax repercussions. To see more about this, read Income Tax Consequences of Expatriation.
If you are thinking about expatriating from the United States, there is some planning that can be done to avoid being treated as a Covered Person. At a minimum, there is planning that you can do to lessen the tax burden.
Wednesday, April 7, 2010
IRA Planning in Light of Robertson v. Deeb
In December of 2009, the Florida Court of Appeals concluded in Robertson v. Deeb, 16 So. 3d 936 (Fla. 2d DCA 2009), that the beneficial interest that a person owns in an inherited IRA may be subject to garnishment. In other words, an IRA that you inherit may be taken by your creditors. This is different from an IRA that you establish yourself, or a retirement plan like a 401(k) or 403(b), which are all protected against creditors.
The result itself did not surprise me much until I read and article by Kristen M. Lynch and Linda Suzzanne Griffin in the April 2010 Florida Bar Journal. Intuitively, it made sense that a creditor can go after an asset that you inherit. Usually, the rule of thumb is that unless an asset is specifically exempted, a creditor can sue to get it.
What made this case unusual, and what I was not aware of, is the fact that there was a specific statute on point, F.S. Section 222.21, which seems to indicate that money payable to the "beneficiary" of an IRA is exempt from all claims of creditors. The Court, however, stated that a beneficiary who inherits an inherited IRA is not entitled to the same protection as a beneficiary who contributes to his or her own IRA.
I do not wish to argue the merits of the Court's decision, but I will point out that as a result of this case, anyone who has a substantial IRA should seriously consider establishing a trust for their loved ones which has "stretch" and asset protection provisions.
For many people, their IRAs are their biggest asset. It is clear, now more than ever, that if you wish to protect your IRA from creditors, you cannot simple name your loved ones as the beneficiaries without risking it being taken. Moreover, you cannot simple name a traditional trust as the beneficiary without incurring large income taxes. You need to do comprehensive IRA planning.
The result itself did not surprise me much until I read and article by Kristen M. Lynch and Linda Suzzanne Griffin in the April 2010 Florida Bar Journal. Intuitively, it made sense that a creditor can go after an asset that you inherit. Usually, the rule of thumb is that unless an asset is specifically exempted, a creditor can sue to get it.
What made this case unusual, and what I was not aware of, is the fact that there was a specific statute on point, F.S. Section 222.21, which seems to indicate that money payable to the "beneficiary" of an IRA is exempt from all claims of creditors. The Court, however, stated that a beneficiary who inherits an inherited IRA is not entitled to the same protection as a beneficiary who contributes to his or her own IRA.
I do not wish to argue the merits of the Court's decision, but I will point out that as a result of this case, anyone who has a substantial IRA should seriously consider establishing a trust for their loved ones which has "stretch" and asset protection provisions.
For many people, their IRAs are their biggest asset. It is clear, now more than ever, that if you wish to protect your IRA from creditors, you cannot simple name your loved ones as the beneficiaries without risking it being taken. Moreover, you cannot simple name a traditional trust as the beneficiary without incurring large income taxes. You need to do comprehensive IRA planning.
Wednesday, March 31, 2010
Mercer County
As most of you may know, I am an attorney with clients based primarily in Mercer County, New Jersey. Accordingly, I was curious how much in estate taxes the residents of each county pay. While having trouble finding that information, I did stumble across some data on the www.taxfoundation.org web site which breaks down how much the residents of each state paid in state estate taxes in 2007.
Not surprisingly, New Jersey residents paid the most per resident, with Pennsylvania residents paying the 2nd most and New York residents paying the 3rd most. What does this mean in real numbers? New York, which received the most in terms of total dollars collected, only received $1,053,384. Pennsylvania collected only $736,610 and New Jersey only collected $586,589. In the scheme of things, this is represents less than .02% of each state's budget.
To be honest, I was a bit surprised by how little was collected, both on a percentage basis and in terms of total dollars. If anyone could send me additional information on other estate tax facts, such as breakdown by county, I would appreciate it.
Not surprisingly, New Jersey residents paid the most per resident, with Pennsylvania residents paying the 2nd most and New York residents paying the 3rd most. What does this mean in real numbers? New York, which received the most in terms of total dollars collected, only received $1,053,384. Pennsylvania collected only $736,610 and New Jersey only collected $586,589. In the scheme of things, this is represents less than .02% of each state's budget.
To be honest, I was a bit surprised by how little was collected, both on a percentage basis and in terms of total dollars. If anyone could send me additional information on other estate tax facts, such as breakdown by county, I would appreciate it.
Wednesday, March 24, 2010
The Importance of Planned Gifting
One of the best ways to minimize your taxable estate is through planned gifting. Anyone who may be subject to a federal or state estate tax, or a state inheritance tax, should at least consider a gifting plan.
The first item to think about is - can you afford it? This is not always an easy question because you may be worth a lot of money, but you might not have a large income to cover your annual expenditures. Accordingly, sometimes the best items to gift are items that do not produce a lot of income, but are worth a lot of money for estate tax purposes. Vacation homes, valuable art collections and a minority interest in a business are all perfect examples of this.
Once you figure out whether you can afford to make a gift, the second question is how much to gift and who do you wish to benefit. These go hand in hand because often times you only wish to benefit certain people or certain charities by a set dollar amount rather than by everything you can afford to give away.
When trying to calculate how much to gift, valuation of the gift becomes crucial. It is beyond the scope of what I wish to discuss here, but be aware that certain gifts may valued at less than you think because discounts should be taken if the gift is not freely marketable and/or the donee does not have much control over the asset after it is received.
Additionally, tax law often plays a key role in how much you give away. Even if you can afford to give away $2,000,000 to charity or to your grandchildren, it may be more beneficial for tax reasons to make smaller gifts over a number of years rather than a large lump sum gift.
This leads us to the third item that we must think about in a gift plan is the timing of the gift. (For more information on this, see my earlier blog post on timing.) You may be aware that the federal government allows you to gift away a certain amount every year (currently $13,000) without a gift tax consequence. Moreover, you may gift away up to $1,000,000 before there is any out of pocket gift tax consequence because you are entitled to a $1,000,000 federal gift tax exemption.
Any good gifting plan is going to try and make maximum use of your lifetime gift tax exemption, annual exclusion amounts as well your ability to pay for another person's educational or medical expenses without incurring any tax consequences. (There is technically no gift if you make payments, for the benefit of another person, when such payments are made directly to certain educational institutions or medical care givers.)
Due to the annual exclusion allowance, practitioners frequently encourage clients to make gifts to their loved ones over the course of many years.
The final item to think about, is the manner in which the gift is made. There are thousands of different ways to make gifts. You can make gift directly to the person or charity you wish to benefit. You can make a gift via a trust (and there are many different trusts such as insurance trusts, charitable lead or remainder trusts, dynasty trusts with or without withdrawal rights, qualified personal residence trusts, etc.). You can make gifts to a 529. You can give away partial ownership of a property. You can have an indirect gift by "giving" money to a company in which you are not the sole owner and not getting anything in return for that extra contribution. You can give up a power that you were entitled to.
Once you have figured out what you can afford, who you want to benefit, how much you want to give, when to make the gift and how to make the gift - then you have a truly planned gift.
NOTE: All items discussed here assume that you are a US citizen or permanent resident alien.
The first item to think about is - can you afford it? This is not always an easy question because you may be worth a lot of money, but you might not have a large income to cover your annual expenditures. Accordingly, sometimes the best items to gift are items that do not produce a lot of income, but are worth a lot of money for estate tax purposes. Vacation homes, valuable art collections and a minority interest in a business are all perfect examples of this.
Once you figure out whether you can afford to make a gift, the second question is how much to gift and who do you wish to benefit. These go hand in hand because often times you only wish to benefit certain people or certain charities by a set dollar amount rather than by everything you can afford to give away.
When trying to calculate how much to gift, valuation of the gift becomes crucial. It is beyond the scope of what I wish to discuss here, but be aware that certain gifts may valued at less than you think because discounts should be taken if the gift is not freely marketable and/or the donee does not have much control over the asset after it is received.
Additionally, tax law often plays a key role in how much you give away. Even if you can afford to give away $2,000,000 to charity or to your grandchildren, it may be more beneficial for tax reasons to make smaller gifts over a number of years rather than a large lump sum gift.
This leads us to the third item that we must think about in a gift plan is the timing of the gift. (For more information on this, see my earlier blog post on timing.) You may be aware that the federal government allows you to gift away a certain amount every year (currently $13,000) without a gift tax consequence. Moreover, you may gift away up to $1,000,000 before there is any out of pocket gift tax consequence because you are entitled to a $1,000,000 federal gift tax exemption.
Any good gifting plan is going to try and make maximum use of your lifetime gift tax exemption, annual exclusion amounts as well your ability to pay for another person's educational or medical expenses without incurring any tax consequences. (There is technically no gift if you make payments, for the benefit of another person, when such payments are made directly to certain educational institutions or medical care givers.)
Due to the annual exclusion allowance, practitioners frequently encourage clients to make gifts to their loved ones over the course of many years.
The final item to think about, is the manner in which the gift is made. There are thousands of different ways to make gifts. You can make gift directly to the person or charity you wish to benefit. You can make a gift via a trust (and there are many different trusts such as insurance trusts, charitable lead or remainder trusts, dynasty trusts with or without withdrawal rights, qualified personal residence trusts, etc.). You can make gifts to a 529. You can give away partial ownership of a property. You can have an indirect gift by "giving" money to a company in which you are not the sole owner and not getting anything in return for that extra contribution. You can give up a power that you were entitled to.
Once you have figured out what you can afford, who you want to benefit, how much you want to give, when to make the gift and how to make the gift - then you have a truly planned gift.
NOTE: All items discussed here assume that you are a US citizen or permanent resident alien.
Timing of a Gift
When doing gift planning, it is imperative to have the gifts completed on the schedule that you want otherwise you may accidentally gift too much one year, causing a tax, or you may gift too little, and lose your annual gift tax exclusion for the year.
Therefore, you must know the answer to this question: When is a gift complete for purposes of the federal gift tax?
Unfortunately, tax law is much like a magic trick - what may appear to be true is not always true. If you give someone cash, is the gift is complete the moment the other person receives the cash? What about a check? What about a transfer of real estate by deed?
Would it make a difference if, when giving you the cash, I told you that you could only spend it on a new car, otherwise I want it back? What if there was not enough cash in the account to cover the check? What if after making the deed I held it and did not show it to anyone else or record it? Things get trickier then...
Three elements are required to establish a gift: "(1) donative intent on the part of the Donor; (2) an actual or symbolic delivery of the subject matter of the gift; and (3) an absolute and irrevocable surrender by the donor of ownership and dominion over the subject matter of the gift, at least to the extent practicable or possible, considering the nature of the thing to be given." (Jennings v. Cutler, 288 N.J. Super 553 (App. Div. 1996)
Donative intent means that the person making the gift (or the Donor) believes in his own mind that he is giving something away. For example, if I give you cash, but I expect you to repay it, it is not a gift - even if I do not tell you at the time that I want to be repaid. Since I expect to be repaid, I do not have the proper mindset, or intent, to qualify this as a gift.
The moment that I no longer wish to be repaid, then that transfer can be a completed gift if the other requirements are met. Often times practitioners make positive use of this intent requirement. We can draft a promissory note for a parent transferring a large sum of money to a child, whereby the child agrees to pay back $X per year. The parent can then forgive that annual repayment, thereby completing a gift as to $X. This technique is commonly used by a parent who wishes to help a child make a down payment on a house, but does not want to use up their lifetime $1,000,000 gift tax exemption. The payments of $X can be structured to be less than or equal to the annual exclusion amount, thereby passing on additional money free of gift and/or estate taxes.
To have actual or symbolic delivery is important because it puts the person receiving the gift (the donee) on notice that they are receiving something. Let's go back to the example of a person making a deed for the benefit of their child and then keeping hidden away from the world. It would be similar to make saying to myself that I'm going to give each of my blog readers $100,000, putting the money in my sock drawer, but not telling you about it. I may have the proper intent, but unless there is some further act, it is not enough.
What further act is necessary puts us into a gray, mushy area of the law. I do not physically have to give you the gift. Some sort of act in furtherance of the gift is enough. Three situations that come up frequently are the writing of a check, the preparation of a deed and the transfer of a business ownership interest, so I will discuss them a bit further.
If you write a check to another person, the gift becomes complete when you've gone that extra step to ensure the other person receives the check. This could mean physically handing it to them or putting it in the mailbox. If there is not enough money to cover the check in your account, the gift would not be complete until there is enough money in the account to cover it. (This gets into another gray area however if bank covers your check.) If, however, you tell the donee not to cash it yet, and they obey, then the gift is not complete until they receive permission to cash the check.
For the gift of real estate, the donor does not necessarily have to record the deed, but the recording of a deed clearly proves the gift was made. (see Fischer v. Gerndt, N.J. Eq. 53, 55 (Ch.1922). Anything short of the deed being recorded puts us in yet another mushy gray area of the law. You could give the deed to the donee to record, which would complete the gift, but then take out a mortgage, negating the gift. You could give the deed to the donee's agent, which would complete the gift, but then sell it that same afternoon to another party, negating the gift. Ultimately, it would be an after the fact determination. Accordingly, when doing gift planning, you should not wait until the end of the year to transfer real estate, because it can take up to a month to record the deed. As stated in the beginning, timing is everything for proper gift planning.
For a gift of a business interest, the donor does not necessarily have to enter something in the stock book or file something with the state, but doing so clearly completes the gift. A letter by the donor to the donee stating, "I hereby give you 10% of XYZ business" could be enough, unless the donor turns around quickly and sells it to someone else. As with the deed, for proper planning, it is best just to take the appropriate steps to make the gift clearly complete.
With respect to the final requirement, "an absolute and irrevocable surrender by the donor of ownership and dominion over the subject matter of the gift, at least to the extent practicable or possible, considering the nature of the thing to be given", it is actually a mouthful but easy to show by example. If I tell you that you can have my art collection when I am done with it - it is not a gift until I tell you I'm done with it. In the example at the beginning, the gift of cash subject to the fact that you can only use it for a new car, the gift is not complete until you either use it for the new car, or I change my mind and agree you can have it no matter what. Generally, you have to give up control of what you are gifting. When you have done that, this element is satisfied.
For more on the importance of planned gifting, see: The Importance of Planned Gifting
Note: Thanks to Paul Kostro for keeping me up to date on much of this information. Paul's Blog can be found at: http://www.kostrolaw.com/NJFamilyIssues/
Therefore, you must know the answer to this question: When is a gift complete for purposes of the federal gift tax?
Unfortunately, tax law is much like a magic trick - what may appear to be true is not always true. If you give someone cash, is the gift is complete the moment the other person receives the cash? What about a check? What about a transfer of real estate by deed?
Would it make a difference if, when giving you the cash, I told you that you could only spend it on a new car, otherwise I want it back? What if there was not enough cash in the account to cover the check? What if after making the deed I held it and did not show it to anyone else or record it? Things get trickier then...
Three elements are required to establish a gift: "(1) donative intent on the part of the Donor; (2) an actual or symbolic delivery of the subject matter of the gift; and (3) an absolute and irrevocable surrender by the donor of ownership and dominion over the subject matter of the gift, at least to the extent practicable or possible, considering the nature of the thing to be given." (Jennings v. Cutler, 288 N.J. Super 553 (App. Div. 1996)
Donative intent means that the person making the gift (or the Donor) believes in his own mind that he is giving something away. For example, if I give you cash, but I expect you to repay it, it is not a gift - even if I do not tell you at the time that I want to be repaid. Since I expect to be repaid, I do not have the proper mindset, or intent, to qualify this as a gift.
The moment that I no longer wish to be repaid, then that transfer can be a completed gift if the other requirements are met. Often times practitioners make positive use of this intent requirement. We can draft a promissory note for a parent transferring a large sum of money to a child, whereby the child agrees to pay back $X per year. The parent can then forgive that annual repayment, thereby completing a gift as to $X. This technique is commonly used by a parent who wishes to help a child make a down payment on a house, but does not want to use up their lifetime $1,000,000 gift tax exemption. The payments of $X can be structured to be less than or equal to the annual exclusion amount, thereby passing on additional money free of gift and/or estate taxes.
To have actual or symbolic delivery is important because it puts the person receiving the gift (the donee) on notice that they are receiving something. Let's go back to the example of a person making a deed for the benefit of their child and then keeping hidden away from the world. It would be similar to make saying to myself that I'm going to give each of my blog readers $100,000, putting the money in my sock drawer, but not telling you about it. I may have the proper intent, but unless there is some further act, it is not enough.
What further act is necessary puts us into a gray, mushy area of the law. I do not physically have to give you the gift. Some sort of act in furtherance of the gift is enough. Three situations that come up frequently are the writing of a check, the preparation of a deed and the transfer of a business ownership interest, so I will discuss them a bit further.
If you write a check to another person, the gift becomes complete when you've gone that extra step to ensure the other person receives the check. This could mean physically handing it to them or putting it in the mailbox. If there is not enough money to cover the check in your account, the gift would not be complete until there is enough money in the account to cover it. (This gets into another gray area however if bank covers your check.) If, however, you tell the donee not to cash it yet, and they obey, then the gift is not complete until they receive permission to cash the check.
For the gift of real estate, the donor does not necessarily have to record the deed, but the recording of a deed clearly proves the gift was made. (see Fischer v. Gerndt, N.J. Eq. 53, 55 (Ch.1922). Anything short of the deed being recorded puts us in yet another mushy gray area of the law. You could give the deed to the donee to record, which would complete the gift, but then take out a mortgage, negating the gift. You could give the deed to the donee's agent, which would complete the gift, but then sell it that same afternoon to another party, negating the gift. Ultimately, it would be an after the fact determination. Accordingly, when doing gift planning, you should not wait until the end of the year to transfer real estate, because it can take up to a month to record the deed. As stated in the beginning, timing is everything for proper gift planning.
For a gift of a business interest, the donor does not necessarily have to enter something in the stock book or file something with the state, but doing so clearly completes the gift. A letter by the donor to the donee stating, "I hereby give you 10% of XYZ business" could be enough, unless the donor turns around quickly and sells it to someone else. As with the deed, for proper planning, it is best just to take the appropriate steps to make the gift clearly complete.
With respect to the final requirement, "an absolute and irrevocable surrender by the donor of ownership and dominion over the subject matter of the gift, at least to the extent practicable or possible, considering the nature of the thing to be given", it is actually a mouthful but easy to show by example. If I tell you that you can have my art collection when I am done with it - it is not a gift until I tell you I'm done with it. In the example at the beginning, the gift of cash subject to the fact that you can only use it for a new car, the gift is not complete until you either use it for the new car, or I change my mind and agree you can have it no matter what. Generally, you have to give up control of what you are gifting. When you have done that, this element is satisfied.
For more on the importance of planned gifting, see: The Importance of Planned Gifting
Note: Thanks to Paul Kostro for keeping me up to date on much of this information. Paul's Blog can be found at: http://www.kostrolaw.com/NJFamilyIssues/
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