Often we receive inquiries from clients regarding how much they may give to children or grandchildren without having to pay U.S. gift tax. (Answer: as of 2015 you have a lifetime exemption of $5.43 million which may be transferred without federal estate or gift tax consequences; an additional $14,000 per recipient per year is excluded from taxable transfers.)
Generally, when this question is asked, people are thinking of cash gifts or perhaps gifts of stocks and securities. However, there are many other transactions that may be considered gifts. The key to understanding what may constitute a gift is determining if an item of value was transferred without adequate and full consideration.
- Contributing to 529 plans. Such plans are an excellent tool for preparing for the expenses of higher education. However, parents, grandparents or others who make contributions to a 529 plan are gifting funds to the beneficiary of the plan.
- Paying for the living expenses of an individual you do not have a legal obligation to support. In addition to non-related parties, this also could apply to adult children. If you are paying for the room and board for a child you are no longer obligated to support, this may be a gift.
- Adding someone’s name to a title of an asset, such as a real estate deed. If you add your child’s name to the deed of your home, you have gifted a portion of the value of your property to your child.
- Giving shares of ownership of a family-held business. In succession planning for many closely-held businesses, often shares of ownership are given to children or grandchildren in order to maintain continuity in the business. These shares may constitute a gift.
- Forgiving a note or paying off a note on behalf of someone. If you forgave a note you held and the borrower did not report it as income on their income taxes, your forgiveness is a gift to the borrower. Similarly, if you have paid off a debt on behalf of someone else, you have made a gift to the borrower even though funds were not given directly to them.
- Taking adult children on vacation. Anytime you give an item of value, whether it is a sweater, a new car or a family vacation, you have given a gift.
All of us give gifts every year that have no tax consequence because of the annual $14,000 per recipient exclusion. For example, if you take your son’s family of four on an extensive Mediterranean cruise, expenses for his family would have to exceed $56,000 for there to be a gift tax consequence for that one gift. However, it is important to remember that the $14,000 exclusion is cumulative of all gifts provided in a year. So, if in one year you bought your adult daughter a car, made a contribution to her 529 plan and gave her a cash gift for Christmas, which when added together exceed $14,000, you may have to file a gift tax return.
There are many financial planning opportunities that enable the structuring of gifting transactions to eliminate or reduce the impact of federal estate and gift tax consequences. Contact us if you are planning on engaging in transactions which may have gift tax implications.