Lifetime gifts are an underutilized way to transfer wealth to loved ones without triggering any transfer taxes.
That noted, you must mind the P's and Q's in the tax code to stay street legal while doing so.
Are you familiar with Form 709?
A recent article from The Motley Fool reminds us that the purpose of IRS Form 709 is to report gifts subject to gift and generation-skipping transfer taxes.
The article is titled "Form 709: Do You Need to File a Gift Tax Return?”
Although this may at first blush seem burdensome, the key is to know when it is required and when it is not.
For starters, the "annual gift exclusion" allows you to transfer up to $14,000 in cash or property to anyone of your choosing.
Consequently, most customary holiday gifts and birthday gifts are below that threshold.
But what about those holiday commercials where a high school age "princess" awakens to find an brand new Lexus convertible awaiting her in the driveway?
I circle back to that question later on (see below).*
Did you know spouses can transfer unlimited assets between themselves without gift tax consequences?
No Form 709 is needed.
The annual gift exclusion applies to each person receiving a gift.
Say your child is married and in a good, stable relationship. You can give $14,000 to your child and another $14,000 to her spouse without any gift tax concerns. In fact, if you are married, then your spouse can do the same. Result? A nice little wealth transfer of $56,000 (plus the future income and appreciation on the gifted assets).
What if you are a "blended family" and your spouse is not the mother of your child in the above hypothetical? No problem, but you may need to mind Form 709.
A special rule called "gift splitting" allows a spouse in a married couple to make double-sized gifts and have them viewed as made equally by both spouses. However, to keep from paying gift taxes you will need to file a Form 709 Gift Tax return.
Did you know certain gifts are "excluded" from the gift tax calculus?
That is right, to include gifts to cover books and tuition, as well as medical expenses.
The hitch? You must make the gift directly to the institution (e.g., school or hospital), not to the person directly benefiting from your generosity.
What if you made a "taxable" gift (e.g., exceeding $14,000 in a given year to a child)?
As we have seen, depending on the circumstances you may need to file a Form 709 Gift Tax return, but likely no out-of-pocket taxes will be paid by you now.
Why?
Fortunately, under the tax code, the federal gift and estate tax provides treats taxable lifetime gifts the same as gifts made from your estate at death. Currently, each person has a lifetime exemption from gift and estate tax which stands at $5.43 million in 2015.
Accordingly, even after you use up your $14,000 annual exclusion in a given year, any excess amount gifted simply reduces your lifetime exemption amount and the amount you can exempt at death.
The original article observes that gift tax returns are frequently needed for more complex estate planning strategies, especially certain highly technical wealth transfer techniques.
* Remember that "holiday princess" I mentioned earlier in this post?
What are the gift tax consequences of that new Lexus convertible in the driveway?
Well, let's take a look based on what we have covered in this post.
First, we can assume that a brand new Lexus convertible is priced higher than $14,000. Therefore, the gift likely will exceed the $14,000 gift exemption watermark, if the donor is single. As a result, the donor must file a Form 709 Gift Tax return.
Second, if the donors are a married couple and the "princess" is their daughter, then each spouse can contribute $14,000 each for a total of $28,000. Should the value of the Lexus exceed $28,000, then a Form 709 Gift Tax return will be required.
Third, if the donor is the mother of the "princess" and the stepfather has children of his own, then the donor can make the full $28,000 gift out of her own funds. Then, with the written consent of the stepfather on a Form 709 Gift Tax return, then mother can make the transfer free of gift taxes up to $28,000 (but a Form 709 Gift Tax return will be required if the value exceeds the available exemption).
Whew.
Before making significant gifts consult an experienced estate planning attorney.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: The Motley Fool (October 3, 2015) "Form 709: Do You Need to File a Gift Tax Return?”
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