Q: I enjoyed one of your speeches on gifting but I lost my notes. Please highlight a few of the points that you made.
A: Tis the season for giving, so let's review some basic rules.
Any transfer where more value is given than received back is a taxable event and gift taxes must be paid. But there are a number of exceptions:
1. One spouse can give the other spouse any amount;
2. Transfers to a tax qualified charity (within certain parameters) are tax-free and could generate tax deductions;
3. One or more transfers will pass tax-free, totaling a maximum tax exemption of $700,000, if the appropriate gift tax return is filed alerting the IRS; and
4. A bit more than $10,000 per person per year (no restrictions as to the number of people receiving the transfers or the total amount transferred or the number of years involved).
If a gift tax is due, it is paid by the giver, not the receiver (no, the amount is not added to his or her income and taxed to the receiver). If the asset (such as an appreciated asset) has a basis (what the giver paid for it), it will retain the same basis in the receiver's hands. Thus the tax on the gain will be about the same whether the giver or the receiver later sold the asset.
The $10,000 is reflective of the net transfer (value minus attached debt). Thus, the basis has no bearing, although the receiver needs to know. If the receiver sells and can not establish the basis, the IRS can deem the basis to be zero and tax the entire sales price.
And when determining if a beneficiary received more than $10,000, all the gifts for the entire calendar year are added together (January 1st to December 31st). Thus, things such as birthday presents, Christmas presents, that surprise vacation, etc. all must be included.
If you want to give the full $10,000, do not give an appreciated gift because eventually the built-in capital gain must be paid when the asset is sold thus diminishing what the receiver actually got.
Gifts to minors pose a number of problems. Minors can own property but they can not enter into binding contracts. So unless gifts are made in special ways, the assets are tied up until the owner (the minor) can legally make transfers (when he or she becomes an adult).
If you gift to minors, do not put their names on as owners. Gift amounts into a trust (not just any trust, but a "crumey" trust), a custodial account, or under the uniform gift to minors act, etc. Someone or thing must have the legal right to deal with the property. As a consequence think twice before you put that stock in the name of a two-year-old.
Yes, you can make a $10,000 gift in late December and then another $10,000 transfer in January and gift $20,000 in a few days, while that same gift during the first part of January would mean that the next gift would have to wait a year until the following January.
There is no three-year revision rule for this kind of gift. A person on his or her death bed (as long as the person has legal capacity) can make the $10,000 gifts and up to the total of $700,000, and none will come back in for estate tax purposes.
I hope the foregoing was not too boring, since it was a bit like reading the Gospel of Timothy. But hopefully the foregoing laundry list will give you a better idea of what the gifting rules are.