Under the law that was passed in late 2010, the available exemptions and allowances for making gifts is larger than ever before. However, before making a gift, you should consult with or talk to the recipients to assure such things as: that they have good marriages, are healthy, do not have tax issues or liens, and are not going to be sued.
Another non-tax issue in making gifts is whether you’re comfortable gifting the funds irrevocably and parting with control of the assets and the income that they may produce. In making a gift, you can gift up to $13,000 per year to as many individuals as you want. These individuals need not be family or even related, but rather, anybody is eligible to receive this gift. You can’t deduct this gift from your tax return, but the recipient doesn’t have to report the gift as taxable income either.
Of course, if charities are involved as recipients, then the rules are significantly different and much more liberal. If you want to make a gift while married, then both you and your spouse are entitled to make a gift of $26,000 per year to as many donees as you desire. However, in the event that only one of you makes the gift, the requirement to file a gift tax return is initiated, although no tax is due. Your “non-gifting spouse” merely has to sign a statement that he or she is allowing you to use their credit on an annual basis for the recipients.
Once the $13,000 per year, per donee is exceeded, the rules in effect through 2012 permit you to gift an additional $5,000,000 during your lifetime. This $5,000,000 credit is basically a unified credit that is able to be used toward gifting during lifetime, value of estate assets at death, or a combination of both. You and your spouse, therefore, have a $10,000,000 exemption that may be used during your lifetimes, which is also in addition to the annual exclusion gifts of $13,000. Once the threshold of $13,000 is exceeded, then a gift tax return is required to be filed by April 15th of the year following the gift for informational purposes only, as there is no tax due until the $5,000,000 exemption has been exceeded.
In addition to the above amounts that may be gifted, you may also pay for educational or medical expenses for your child or grandchild as long as the payment is made to the provider. Again, these amounts are not available for a charitable deduction, since there is a service or a benefit being provided to an individual, not necessarily the charity. Therefore, although these are not taxable gifts, you must also again part with control of the asset when making the gift. There may not be any strings attached or benefits provided that would constitute the gift to be an incomplete gift or a sham.
In some ways, the gift to or for the benefit of your grandchild’s care or education basically becomes a gift to your children, since they are relieved of their obligation to pay for their own children’ expenses. This will allow them to retire earlier, not borrow as much for educational expenses, or perhaps use the funds that would have been allocated for their children’s education in another way.
One of the benefits of making a gift during lifetime is that the recipient may thank you for the gift now. Once you become incapacitated or pass away, the availability of being recognized and thanked has basically been extinguished.
In addition, by making gifts during lifetime, all appreciation in value of the gift is out of your estate for estate tax purposes, as well as the income. You may have to report the income on your own tax return, but you’re probably in a lower tax bracket than the recipient. Of course, a detriment of making a gift is that if the recipient was hoping to receive financial aid, they may be disqualified by the amount of funds that are being gifted to them on an annual basis.
Additional factors to consider are whether the gift will or will not appreciate after it is made, what the basis is in the gift, that is, whether there will be a gain or loss recognized when the recipient liquidates the asset, and whether that person is mature enough to handle the funds being gifted. You must remember that “a gift is a gift is a gift” and once it is made, it is irreversible and irrevocable, so there should not be any remorse after the gift is made regardless, of the financial or personal situation of the recipient.
Hyman G. Darling, Esq.
Photo Credit: Microsoft