Sheppard, Brett, Stewart, Hersch, & Kinsey, P.A. Attorneys at Law

Year End Gift Giving - Avoid Gift Taxes

With each passing year it seems like the New Year rolls around sooner. This is also the time of the year when many start thinking about what they can give their children and grandchildren. Uncle Sam limits the amounts we can give “gift tax free” to anyone, so I thought I would review some of those rules for you now. 

The most that you can give tax free to any one person is $12,000. This counts whether you give cash, a valuable painting, a car or any combination of items. A husband and wife together can give $24,000 worth of assets to any one person during a calendar year and count them as tax free. If the assets aren’t gifted from a joint account, you can still treat the gift as coming from both the husband and the wife so long as a Gift Tax Return Form 709 is timely filed, and the spouse elects to “split the gift” by checking a box on the return and signing it.

Gift splitting is more common in second marriage situations.

An example might help assist in understanding this technique. Suppose that Robert is married to Doris, and that this is a second marriage. Robert has two sons from a prior marriage, Herb and Scott. Doris has two children from her prior marriage, Sophia and Rachel. Robert wishes to give each of his sons, Herb and Scott $24,000.  Assume further that Robert and Doris maintain separate bank accounts.  

So Robert transfers $24,000 each to Herb and to Scott. This would be a taxable gift exceeding the $12,000 per beneficiary rule unless Doris agrees to “split the gift” by signing a Gift Tax Return Form 709. Doris is not affected by splitting the gift, nor are her children affected. In this example, Robert is gifting money from Robert’s separate bank account. Doris may therefore still give $12,000 each to her children and grandchildren. In fact, Doris can ask Robert to split the gifts to her children, Sophia and Rachel to give them $24,000 each as well so Doris can write those checks directly from her account. 

In addition to gifts of money, many of my clients tell me that they intend to give other items, such as valuable paintings or jewelry. In order for a gift to be considered “tax free” and to remove it from the estate for federal estate tax purposes, the donor must actually transfer custody of the asset to the donee.

Let’s illustrate this by another example.Suppose that Doris intends to give a valuable Monet painting to her daughter Sophia. Doris tells Sophia that the painting is hers, but that Doris intends to keep the painting in Doris’ living room until she dies. “After I die I want you to take the painting off the wall and put it in your home,” Doris instructs Sophia. 

Doris

has not made a tax free gift to Sophia. In fact, Doris has not made a gift at all. If Doris dies with the Monet still hung on her wall, then under the tax law the painting is included in Doris’ estate for federal estate tax purposes. Clients often ask me how would the IRS know whether the painting was still hanging in Doris’ home at the time of her death?

The answer lies in a number of places. The most likely clue of ownership might be uncovered when the IRS requests a copy of Doris’ homeowner’s insurance. The IRS would look to see whether at the time of Doris’ death there was a rider on the homeowner’s policy covering the Monet. If Doris truly transferred the Monet to her daughter Sophia, then there would be no reason for Doris to continue to insure it.

 

If you have any particular questions about gifting that may be affected by the tax laws, discuss them with your estate planning attorney prior to making the transfer.

This entry was written by Craig R. Hersch and posted on November 30, 2007 at 7:25 am and filed under Estate Planning. Bookmark the permalink. Follow any comments here with the RSS feed for this post. Post a comment or leave a trackback: Trackback URL.

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