Skip to content 
Gifting in General
An annual
exclusion giving program is a simple and powerful method to reduce one’s
taxable estate upon death. In general,
an individual with a net worth over $5,250,000 in
2013 (or a married couple whose combined net worth exceeds $10,500,000) can
anticipate that federalestate taxes will be due upon death.
An individual
can give $14,000 each year to as many persons as he or she may choose ($28,000
for a couple). A done may be a child, a
child’s spouse, other family member, or a non-relative. Annual gifts that do not exceed the $14,000
limit are not subject to federalgift tax, and no gift tax return needs to be
filed for such transfers. For most states, annual exclusion gifts often do not
incur state gift taxation because most states do not impose a gift tax.
Annual
exclusion gifts that are made outright to a grandchild or more remote
descendant also do not incur generation-skipping transfer (GST) tax. GST tax may otherwise apply when lifetime
transfers or transfers upon death are made which skip a generation.
The federal
estate tax benefit of a single $14,000 annual exclusion gift can be about
$5,600 (40% tax). Any future
appreciation in value or the accumulation of future income generated by the
property given away is also excluded from the donor’s taxable estate. For residents of the District of Columbia and
Maryland, additional savings of about $1,100 apply because these jurisdictions
impose their own estate tax in addition to the federal estate tax.
A married
couple can effectively double the savings. This can be accomplished with
each spouse, separately each
from their own separate bank account, giving $14,000 each per recipient
(for a total of $28,000). Further, a married couple can use each
individual spouse’s $14,000 annual limit regardless of which spouse actually
owns the transferred money (or property), such as when a jointly held checking
account is used to pay out the gifts from. This is accomplished by the timely filing of a
federal gift tax return signed by both spouses, making the so-called
“split-gift election.” The need for the separate gift tax
return can sometimes be avoided simply by avoiding the use of a jointly held
checking account for gift giving, and using a separately held bank account from
which the gift is made from.
In addition
to the $14,000 annual gift tax exclusion, an individual may directly pay medical
or educational expenses in an
unlimited amount. Such payments are
excluded from the federal gift tax (also avoiding gift and estate taxes in most
states) and do not reduce the $14,000 annual exclusion. If the person
qualifies as your dependent for medical itemized deductions, you may be
entitled to a deduction for the payments as well.
Annual
exclusion gifts may be (and frequently are) made in trust. The trust must be specifically designed to
ensure that annual gifts made in trust continue to qualify for the $14,000
annual exclusion, otherwise an annual gift tax return is required and your
life-time exclusion is depleted. Annual exclusion gifts also may be made
to Educational Section 529 plans to cover college costs for a beneficiary, such
as a grandchild. Special
feature: optionally, via an election made on a gift tax return, five years
of annual exclusion gifts may be made all at one time (i.e., up to $70,000 for
an individual donor in 2013, or up to $140,000 for a married donor electing a
split-gift election) to a Section 529 plan.
Spousal Gifts
If your
spouse is a U.S. citizen, then due to the unlimited marital deduction you can
gift any amount to your spouse without incurring any federal gift tax or state
gift tax consequences as long as the gift is of a present interest.
If your
spouse isn’t a U.S. citizen, then you are given an annual exclusion from gift taxes for
gifts of a present interest made to your noncitizen spouse. In 2013 the annual exclusion from gift taxes
for gifts made to a noncitizen spouse is $143,000.
In order for
a gift to your spouse to qualify for either the unlimited marital deduction if
your spouse is a U.S. citizen or for the annual exclusion from gift taxes if
your spouse isn’t a U.S. citizen, the gift must be of a “present
interest” in the gifted property. In other words, you need to give the
property entirely over to your spouse for his or her use, enjoyment and
benefit, free from any strings attached.
Contrast this
with a gift of a “future interest” – this is a type of gift with
strings attached, meaning that your spouse won’t have complete use and
enjoyment of the gift until some future point in time. A gift of a future interest doesn’t qualify
for the unlimited marital deduction, the $14,000 annual exclusion from gift
taxes for gifts made to nonspouses, or the $143,000 annual exclusion from gifts
taxes for gifts made to a noncitizen spouse.
A common
example of a gift of a future interest is reserving a life estate for yourself
in a piece of real estate and then when you die your spouse will become the
full and vested owner of the property. Another example is a gift made into a
trust for the benefit of your spouse instead of giving the gift directly to your
spouse – if your spouse doesn’t have the immediate right to use, enjoy and
benefit from the property gifted into the trust, then you’ve made a gift of a
future interest to your spouse.
If you’ve
made a gift of a future interest to your spouse, then regardless of whether or
not your spouse is a U.S. citizen, the entire gift is taxable for gift tax
purposes and must be reported to the IRS on Form 709, United States Gift (and Generation-Skipping
Transfer) Tax Return.
Non Residents
The
Internal Revenue Code (IRC) imposes a tax on the transfer of property by gift [1].
The gift tax applies to both direct and
indirect transfers of real, tangible and intangible property. However, the tax does not apply to a
nonresident taxpayer that is not a citizen of the U.S. unless the property being
transferred is situated within the U.S. at the time of the transfer.
[2]
The tax does not apply to the transfer of intangible property by a person who
is neither a citizen nor a resident of the United States unless such person is
an expatriate who lost his or her citizenship within 10 years of the date of
the transfer. [3] Real and tangible
personal property are generally situated within the U.S. only if they are
physically within the U.S. in a geographic sense. [4] Intangible personal property is located
within the U.S. if it consists of a property right legally enforceable against
a resident of the U.S. or a domestic corporation. [5] Cash, or bank deposits,
are considered tangible personal property.
[6]
Deposits owned by nonresident aliens in United States banks are treated as
property situated outside of the United States if interest from the accounts is
not effectively connected with the conduct of a trade or business within the
United States. [7] Transfers, or gifts,
that a U.S. resident receives from a nonresident alien that exceed $14,139 (for
corporations) or $100,000 (for individuals) annually must be reported on Form
3520.
[ 1] IRC
§2501(a)(1)
[ 2] I RC
§2511(a)
[ 3] Treas.
Reg. §25.2511-1(b)(1)
[ 4] Treas
Reg §25.2511-3(b)(1)
[ 5] Treas
Reg §25.2511-3(b)(2)
[ 6] BLODGETT
V. SI LBERMAN, 227 U.S. 1 (1928);
THOM
AS V. VI RGI NI A, 364 U.S. 443 (1960); Rev. Rul. 55-
143,
1955-1 C.B. 465
[ 7]I RC
§2105(b)(1)
