Another year is almost over! While 2017 was diverse and full of interesting happenings, can you believe another year end is almost here? Are you relieved? Scared about what 2018 is going to bring?
But with the New Year inevitably come questions about gifting and taxes. Most gifts to our loved ones are gift tax free, but you should know some basics before gifting anything of value to your children, grandchildren and other loved ones.
As of right now, the most that you can give tax free to any one person is $14,000 in any calendar year. For 2018, the exemption will go up to $15,000. This counts whether you give cash, a valuable painting, a car or any combination of items. Currently, a husband and wife together can therefore give $28,000 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 Frank is married to Suzanne, and that this is a second marriage. Frank has two sons from a prior marriage, Francis and Travis. Suzanne has two children from her prior marriage, Dorothy and Monica. Frank wishes to give each of his sons, Francis and Travis $24,000. Assume further that Frank and Suzanne maintain separate bank accounts.
So Frank transfers $28,000 each to Francis and to Travis. This would be a taxable gift exceeding the $14,000 per beneficiary rule unless Suzanne agrees to “split the gift” by signing a Gift Tax Return Form 709. Suzanne is not affected by splitting the gift, nor are her children affected. In this example, Frank is gifting money from Frank’s separate bank account. Suzanne may therefore still give $14,000 each to her children and grandchildren. In fact, Suzanne can ask Frank to split the gifts to her children, Dorothy and Monica to give them $28,000 each as well so Suzanne 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 art 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 Suzanne intends to give a valuable Rodin sculpture to her daughter Dorothy. Suzanne tells Dorothy that the sculpture is hers, but that Suzanne intends to keep the sculpture in Suzanne’ living room until she dies. “After I die I want you to take the sculpture off the mantle and put it in your home,” Suzanne instructs Dorothy.
Suzanne has not made a tax free gift to Dorothy. In fact, Suzanne has not made a gift at all. If Suzanne dies with the Rodin still on her mantle, then under the tax law the sculpture is included in Suzanne’ estate for federal estate tax purposes. Clients often ask me how would the IRS know whether the sculpture was still hanging in Suzanne’ 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 Suzanne’ homeowner’s insurance. The IRS would look to see whether at the time of Suzanne’ death there was a rider on the homeowner’s policy covering the Rodin. If Suzanne truly transferred the Rodin to her daughter Dorothy, then there would be no reason for Suzanne to continue to insure it.
Some folks think that they are clever by “selling” something of value as opposed to gifting it. Suppose Peter “sold” a piece of property to his daughter Gabriele for $10,000 when in fact the fair market value of the property at the time of the transfer was $110,000. Here, despite the fact that Peter “sold” it, the IRS would consider the transaction to be a $100,000 gift (calculated as a transfer of $110,000 of property for $10,000).
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.
The Sheppard Law Firm is located in Fort Myers and Naples by appointment.
© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.