Cash to Cover Up an Affair? Yep, That’s a Gift!

...Or at least it seems like it was considered a gift in the context of former Senator John Edwards’ affair with Rielle Hunter.  Rachel Mellon, an heiress with billions in assets, gave Rielle $725,000 to keep quiet about her affair with John and their resulting baby.  Because Mellon gave Rielle the money on John’s behalf, the $725,000 was probably correctly considered a gift to John.  While that’s generous, perhaps more astounding is that the government likely made more on the gift than did the recipient.   Indeed, Mellon’s gift probably cost her $786,083 to the IRS, thanks to two different taxes:  The gift tax and the generation-skipping transfer tax (“GST”).  Each tax is subject to an exclusion, so that when gifts are made under a certain amount, tax is not owed.  However, assuming that a woman as wealthy as Mellon previously consumed those exclusions, the taxes applied to her gift would have been greater than the gift itself.

If you’re curious about the exact calculation, you can read about it in Forbes.  The amount was calculated using the 2008 exclusion amounts and tax rates.  In 2012, there is an annual gift exclusion of $13,000, a lifetime gift exclusion of $5,120,000, and a GST exclusion of $5,120,000.  You can give gifts of $13,000 to whomever you’d like, and to as many people as you’d like, but when the gift exceeds that amount, it counts against your lifetime exclusion.   Now, the GST is more confusing, but it usually applies when a transfer is made to an individual who is more than one generation younger than you.  Importantly, these exclusion amounts may not last forever.  After 2012, they may be reduced, and this can have important consequences for your estate planning.

-  Gary Altman, Esq. and Coryn Rosenstock

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