Am I understanding Gift Taxes right?

The attorney is correct.

If it's a gift, he should file a gift tax return. If he doesn't, the statute of limitations won't run on the gift, and the IRS could audit him at any time on this. That's not likely, though.

The gift tax exemption is not $14,000 per person, so he and his wife could give each of you $28,000. However if any of the gift were to be attributed to the wife, he would still have to file a gift tax return to select "gift splitting."

A simpler option might be a qualified disclaimer. Normally a person who inherits something can execute a qualified disclaimer within 9 months, and whatever is disclaimed will be treated as if that person died before the donor.

Assuming MIL had no other children, (and BIL has no children, depending on state law) the amount disclaimed will go directly to your wife without gift tax and without having to file a gift tax return.

If he fails to file a gift tax return and is audited, would he simply be obligated to file a gift tax return and deduct it from his lifetime exemption, or could the IRS say it is too late for that and he has to pay gift tax on it?

Big difference!

I wasn't aware of the gift splitting. That complicates that....

Over and above Stuart's comments:

I seriously doubt that the attorney said the bank accounts were not part of the estate. Concurrently owned property, e.g. joint tenancy, is included in one's estate. What the attorney probably said or should have said, is that the bank accounts will pass to the joint tenant outside of probate and the estate is too small to pay any tax. The gross estate includes both probate and non-probate assets.

But I doubt he will want to file a gift tax return.

Remember - that has no effect on you so long as no gift tax was due. If he owed a gift tax you could be a transferee and it could be collected from you. However, if no gift tax is due (and unless he has used up his $5,000,000+ lifetime exemption, there wouldn't be), then his failure to file one is his problem and has no effect on you.

I googled on "joint bank account estate tax" and get a variety of information. Most say that unless it is disputed and there is clear documentation to the contrary, it is not part of the estate. Others say that it is part of the estate, and still others say that 50% of it is in the estate. Unfortunately my wife didn't want me to talk to the lawyer; she and her brother really didn't understand what was going on.

The term "part of the estate" is ambiguous. Some or all of it (depending on several factors) is certainly part of the estate for estate tax purposes. But it is not part of the estate for probate purposes.

Exactly.

People use the term "joint" in more than one way. Normally it will mean holding property in joint tenancy. Some people use it simply to mean that there is more than one owner, irrespective of how title is held.

If property is held in joint tenancy, it is not part of the estate for probate purposes.

But joint tenancy property is part of the estate for estate tax purposes.

If joint tenancy property is held by spouses, half of the value is included in the estate of the first to die for estate tax purposes. If it is held by other than spouses, the percentage ownership will depend on the ages of the owners, and the actuarial values calculated for each.

Since you say that BIL has a total estate well under $5 million, it is unlikely that a problem will come up, even if he does what he plans without filing a gift tax return. No actual tax (gift or estate) will be owed in any case.

Okay, so the bank accounts are part of the estate, but don't go through probate. The lawyer said she gets 5% of the estate. Is that likely to be the entire estate, or just the probated part? My wife and BIL don't know, but is a huge difference.

My BIL would not have to pay any tax on the gift, but would have to file a gift tax return. How big a deal is that? If he fails to do so, and gets audited, is there a penalty. I don't want to let him get into trouble, but also don't want to be a nuisance needlessly.

I appreciate the help.

You need to look to your (that is, your MIL's) state law for a definitive answer, but usually the lawyer's fee is negotiable with a state imposed limit of x% of the probate estate. Presumably, that is 5% in your MIL's state. If the probate estate is very simple, you might be able to negotiate a lower rate. If it's complex, the lawyer can petition the court for a fee larger than the state limit.

Ira Smilovitz

Well, what exactlyl is the 5% for? If the fee is for her actions as executor, then it's probably only on the part of the estate that goes through probate. But that may depend on your state's laws.

I googled on "NY Executor estate fee" and found it was the 5% up to $100,000 4% etc. my wife said. But it not only excludes the bank account, but the house as well (assuming the lawyer isn't involved in the sale). There isn't really anything left but an old car. She isn't going to make out very well on this one.

Thanks much.