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The concept of gifting is an excellent tax-planning strategy for generous, wealthy people.
A donor’s gifts made during the calendar year to any individual are excluded from the gift tax up to $14,000 for gifts made in 2014 and are not taxable to the recipient of the gift.
Gifts to a noncitizen spouse have a higher exclusion – $145,000 for 2014. The gift must be a present interest because gifts of future interests do not qualify for the exclusion. A gift in trust qualifies for the exclusion only if the beneficiary has a present income or principal interest in the gift.
The amount of gifts made by a donor to each donee, up to the inflation-adjusted annual exclusion amount, is excluded from the total gifts made by the donor during the calendar year.
The annual exclusion is available to all donors, including nonresident citizens.
The gift tax exclusion is lost if it is not used by the end of the year. Accordingly, a taxpayer who is projected to have an estate subject to federal estate tax and has the means to make gifts to family members or other heirs should consider gifting before the end of each calendar year to use the annual exclusion.
Example: On June 1, 2014, Mr. Smith gave cash gifts of $15,000 to each of his three sons and $5,000 to each of his daughters-in-law.
The first $14,000 of gifts to each son is exempted from gift tax by the annual gift tax exclusion. The additional gift of $1,000 to each son is added to Mr. Smith’s taxable gifts. This reduces Mr. Smith’s lifetime gift exclusion and will require him to file a gift tax return. However, no gift tax will be due unless Mr. Smith has already used his entire lifetime exclusion, which is $5.34 million in 2014.
The entire $5,000 gift to each daughter-in-law is exempted from gift tax because it is less than the available annual exclusion. Mr. Smith could give an additional $9,000 gift to each daughter-in-law, which would allow him to maximize his annual gift exclusion of $14,000 to each of them.
Applicable state law provisions for delivery of a gift must be met before the end of the year for the gift to qualify for the exclusion for that year.
If spouses consent to split all gifts made by either of them during any calendar year and each spouse is a citizen or resident of the United States, the gifts can be considered as made one half by each spouse.
By using this strategy, spouses may transfer twice the annual per donee exclusion amount each year free of gift tax.
Example: In 2014, Mrs. Jones gives $28,000 to each of her three sons, and her husband Mr. Jones gives $28,000 to each of his three sisters.
The Jones consent to split gifts for 2014. Therefore, Mrs. Jones is treated as having given $14,000 to each son and to each of Mr. Jones’ sisters, and Mr. Jones is treated as having given $14,000 to each of his sons and $14,000 to each of his sisters. Employing this strategy allows all six gifts to be made tax free.
Present-interest gifts to each donee are also exempt from the generation-skipping transfer (GST) tax to the extent of the amount of the applicable annual gift tax exclusion. This can be an important estate planning strategy that allows donors to benefit multiple generations.
However, it is important to note that the exclusion does not apply to any transfer to a trust for the benefit of a donee unless:
1. During the life of the donee, no portion of the corpus or income of the trust may be distributed to, or for the benefit of, any person other than the donee, and
2. If the trust does not terminate before the donee dies, the assets of the trust will be included in the donee’s taxable estate.
Gifting to a trust can be a complex transaction, and it is important to consult with a tax attorney to be sure you comply with these rules.
A donor’s gifts to his or her spouse are generally fully deductible from the donor’s taxable gifts and, thus, exempt from gift tax.
This deduction, however, does not apply to gifts to a spouse who is not a citizen of the United States.
Instead, gifts to a noncitizen spouse that would otherwise qualify for the marital deduction are excluded from the donor’s taxable gifts, up to an inflation-adjusted annual exclusion amount of $145,000 for calendar year 2014.
A comprehensive gifting plan can greatly reduce the size of the donor’s estate and minimize future estate tax liability. Gifting also allows the donor to make gifts to heirs and see how those gifts are used and enjoyed. This can be a very fulfilling experience for many donors.
Consult with you tax and legal advisors to craft a gifting plan that will benefit you and your family.