Completed gifts of specific property, including specified amounts of cash, to designated beneficiaries is an excellent way to transfer wealth or cherished property to intended individuals or charitable organizations. Specific gifts may be made during lifetime or at death. The discussion below focuses primarily on lifetime (inter-vivos) transfers. Such gifts may be outright, made through various trusts, or through forgiveness of indebtedness. A "completed" gift occurs only when the donor has irrevocably relinquished dominion and control over the property. Legal requirements for a completed gift also include: a competent donor, a competent donee, donative intent on the part of the donor, transfer of the property (actual or constructive), and acceptance by the donee.
Under current federal transfer tax law, every living individual may annually transfer $12,000 fair market value of present interests in property to each of as many individuals as he or she wishes without these transfers being subject to federal gift taxation. This is referred to as the "annual gift tax exclusion." If the non-donor spouse consents to split the gift with the donor spouse, then the annual exclusion is $24,000. The annual exclusion amount is indexed for inflation. Gifts for which the donee does not receive beneficial enjoyment until some future year (certain gifts in trust, for example), referred to as gifts of future interests, do not qualify for the annual gift tax exclusion.
Under certain circumstances, various transfers in any one year may exceed these amounts. First, the law permits unlimited transfers between U.S citizen spouses without imposition of gift tax. In addition, payments directly to a medical provider or educational institution on behalf of another individual do not constitute taxable gifts to that other person. Five years' worth of annual gift tax exclusion amounts may be gifted in a single year to a "section 529" education plan without constituting taxable transfers in that year. A husband and wife with three young children could, for example, transfer $360,000 of cash into section 529 plans in a given year without making taxable transfers to the children.
Under both current and proposed federal transfer tax law, including the unlikely complete repeal of the estate (and generation-skipping) tax, lifetime gifts will remain subject to gift tax levied on the donor. In addition to the annual gift tax exclusion amount, a credit for gift tax on lifetime transfers is available for non-spousal gifts up to $1,000,000. The gift tax rates paid on lifetime transfers in excess of $1 million currently depends on the year in which the gifts are made.
Under the current unified transfer tax system for gifts and estates, lifetime transfers (at their values on the date of the gift) are added to a decedent's gross estate in computing the unified transfer tax. This has the effect of subjecting the date-of-gift value to the highest marginal applicable transfer tax rates. The tentative tax on the combined lifetime and testamentary transfers is reduced by the unified transfer tax credit and a credit for the amount of gift tax actually paid during the donor's life. Appreciation in value from the date of the gift through the date of the donor's death generally is not subject to tax in the estate of the decedent. Certain lifetime transfers (transfers in which the donor retained an interest and gifts of life insurance within three years of death, for example) are brought back into the donor's gross estate at date-of-death value.
While the discussion above has focused on the transfer tax consequences of lifetime transfers, such gifts have significant income tax consequences as well. Although receipt of property via gift (or bequest) is specifically excluded from the donee's federal gross income, the tax basis of the property received from the donor can have a profound impact on the donee's taxable income when he or she disposes of the property. Generally, the donee's basis for determining gain or loss of the disposition of property received by gift is the lesser of the fair market value of the property on the date of gift, or the donor's own basis in the transferred property (the concept of "carryover" basis). There are exceptions to this general rule. This carryover basis scheme differs markedly, however, from basis in property received from a decedent which is generally "stepped-up" to fair market value on the decedent's date of death. The future of basis step-up versus carryover basis will depend on legislation to amend, extend, or repeal the federal estate tax.
The legal and tax considerations for lifetime giving are numerous and require carefully planning. Timing of the transfer, choice of property to gift, and transfer method (outright or in trust) depend on non-tax as well as tax objectives. Our role in working with donors is to help select the appropriate property to gift and the time to make the gift that best fits the donor's overall family estate planning objectives. We then work with the donor(s) and his or her legal counsel to effect the transfer in the most tax-advantaged manner, consistent with the overall plan.
We would be honored to work with you and your family in planning specific lifetime gifts.
©2008 Ronnie C. McClure, PhD, CPA