The holiday season is fast upon us and everything is looking for that perfect gift. (If you're not sure what to get me, I'll be happy to forward you my Christmas list…..all 8 pages 🙂 In the financial world, the term gift has a whole new meaning as it pertains to estate planning. Many investors look to “gift” a portion of their estate to prevent having to pay a hefty estate tax down the road.
If you want the bottom line about the gifting tax here it is: If you make gifts to friends or family that is large enough, there is the possibility that you may owe the federal government some tax money. Of course, you probably want more information about the current regulations of the federal gift tax. Keep reading and I'll share a few of the major points for 2010 and beyond. Sorry if this isn't as exciting as the Nutcracker.
First, and perhaps foremost for some, is the fact that you, as the giver, are not going to be taxed (unless you exceed the gift tax exemption). It is the recipients who will have to pay taxes. For taxes to figure into the equation at all, you will have to have given away in excess of $1 million in cash or other assets over the course of your life. Plus, if you have a spouse they have their own separate exemption for the same amount. What this means is that most people will never have worry about the federal gift tax at all.
The gift tax also includes the annual gift tax exclusion. This exclusion allows you to gift up to $13,000 during a calendar year – without counting against that $1 million lifetime limit. Currently, the figure remains the same now for 2010 and there is every indication that this exclusion will remain the same for 2011. If you exceed $13,000 the difference is applied to your lifetime exemption.
Another important point is the capabilities of gift splitting. If the husband and wife are both living and one child (for example), the husband can gift $13,000 to the child and the wife can gift $13,000 to the same child and not affect your lifetime income limit. One other important point regarding gift splitting is that for it to work, each spouse must consent to splitting of the gift. This is done with the appropriate form which I'll discuss next.
IRS Form 709 – Gift Tax Return
Another question that I get is: what paperwork do you have to file with the IRS if you do gift? The good news is that if you don't exceed the $13,000 annual gifting amount, no paperwork is needed – how sweet is that! The two instances that do require the IRS Form 709 are:
- You exceed the $13,000 annual gift to any one person (other than your spouse)
- You consent to splitting a gift
- You give a gift of future interest
You gave your spouse an interest in property that will be ended by some future event.
You can read more about the IRS Form 709 in IRS Publication 950.
More from GFC, Below
Another regulation concerns the federal estate tax exemption.
This provision allows you to leave up to $3.5 million that is free of federal estate taxes. As with the lifetime federal gift tax exemption, if you have a spouse they are allowed a separate exemption. There are indications that this figure will change much for 2011. Additionally, any gifts that you make during your life will decrease your taxable estate. Those gifts that exceed the yearly exclusion will lower your estate tax exemption. The point here is that if you make annual gifts that fall within the constraints of the exclusion, you can actually reduce your taxable estate without suffering negative repercussions.
Gifting and 529 Plans
There a special provision in the federal gift tax guidelines that address 529 plan contributions. These are college saving plans that can be used by a future student to pay tuition and other educational expenses. The rule allows you to give lump sums as gifts that are then spread over a certain period of time (typically 5 years). This can be done without affecting the lifetime gift tax exemption or the estate tax exemption.
Gifts Can Be Tax Exempt
You will also find a listing of instances where your gifts can be considered tax-exempt. This means you can offer unlimited gifts in these areas without worrying about the gift tax or the estate tax. They include gifts given to spouses (assuming U.S. citizenship), to cover another person’s medical expenses, and someone else’s tuition expenses if paid directly to the college or university (some exceptions may apply).
There are also stipulations for filing a gift tax return.
This applies if you make a taxable gift that exceeds the annual exclusion rate. You would then be required a Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. You are required to fill it out even if you don’t owe taxes because of the $1 million exemption. There are certain filing rules based on your marital status and any gifts you want to claim on a return. Spouses will have to file their own returns, though some may choose to split gifts on the separate returns.
If you're planning on gifting assets held at a brokerage firm, I strongly suggest you check their policies regarding gifting certain securities. While you have until the end of the year to technically give the gift, certain firms may have sooner deadlines. Here's an example of what you might see:
With the process and the desire for clients to complete gifting by year-end, Brokerage XYZ must receive client signed instructions in good order no later than December 17, 20xx, to ensure that the gifting of shares takes place and settles in the desired account. Any requests received on or after December 20, 2010, will be processed on a best efforts basis.
Gifting Strategy Right For You?
If you are considering gifting as part of your estate planning, I strongly encourage you to meet with a qualified estate planning attorney. Recently, I had a client that questions on gifting (more advanced case) and I placed a call to a local attorney. I was dumbfounded on how so many of the rules that I was familiar with had changed. Lesson learned: it pays to have someone on your side who knows what's going on. Don't go at it alone.