Moore Together: Gift Taxes and Year End Planning

Moore-Together-Graphic.jpgMoore Stephens North America is comprised of 40 member firms that provide key services across a wide variety of industries and niches. This month’s “Moore Together” is a collaboration between Cathy Johnson with The Bonadio Group and Asher Mendelsberg with Topel Forman.

Year-end tax planning can be a headache, especially if you’re trying to maneuver your way through new legislation. Many Moore Stephens North America member firms offer family wealth planning services and can provide valuable insight for end of the year planning as it relates to gift taxes.

What is a gift?
Broadly defined, a gift is any transfer to an individual or irrevocable trust, either directly or indirectly, where full consideration is not received in return.

Gifts can include cash, property, or the use of property. Gifts can also include the sale of something to another person at a purchase price less than the property’s value.

For example, you own a home that is worth $180,000 that you want to sell to your adult child for $100,000. The $80,000 difference between the fair market value of the home and the agreed upon purchase price is considered a gift.

What is subject to the gift tax?
Gift tax generally only applies to gifts that exceed the IRS annual exclusion amount. For 2018, a donor is entitled to an annual gift tax exclusion amount of $15,000 per donee. The donor (not the recipient) will be subject to gift tax for any gifts to a single donee that exceed this amount.

Since the exclusion amount is determined per recipient, a grandmother with four grandchildren could gift $60,000 ($15,000 x 4) to her grandchildren gift tax-free.

Can I split gifts with my spouse?
Married couples have the option to elect to split gifts. All eligible gifts during the calendar year to third parties will be treated as having been made by each of the spouses separately for half of the total amount and can effectively allow for a $30,000 gift from a single donor to a single donee to be within the annual exclusion amount. 

To split gifts, both spouses must consent and potentially file separate gift tax returns, reporting their share of the gifts. To qualify for gift splitting:
  • You and your spouse must be married at the time of the gift.
  • If you are divorced or widowed after the gift, you cannot remarry during the rest of the calendar year.
  • Both you and your spouse must be citizens of the United States at the time of the gift.
  • You cannot give your spouse a general power of appointment over the transferred property.
What is not subject to the gift tax?
The IRS has excluded certain gifts from the gift tax. These gifts include:
  • Gifts from one spouse to the other spouse (non-U.S. citizen spouses are subject to annual limitation)
  • Charitable gifts
  • Gifts to political organizations
  • Tuition or medical expenses paid directly to an educational or medical institution for someone else
It is important to note that to qualify for the educational exclusion, the payment must be made directly to the qualifying educational institution and it must be for tuition. No educational exclusion is allowed for books, supplies, room and board or other expenses that are not direct tuition costs. Also, contributions to qualified tuition programs (also referred to as section 529 plans) on behalf of a designated beneficiary do not qualify for the educational exclusion.

Similarly, in order to qualify for the medical expense exclusion the payment must be made to a person or institution that provided medical care for the beneficiary. Qualified medical expenses include: expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for transportation primarily for and essential to medical care. Amounts paid for medical insurance on behalf of an individual also qualify.

Do I need to file a gift tax return?
While many gifts fall outside the reporting requirements, you are required to file a gift tax return if:
  • You gave gifts to someone that exceeded the $15,000 (2018 amount) annual exclusion;
  • Certain gifts called future interests do not qualify for the annual exclusion. Gifts of future interests are gifts that the recipient cannot actually possess or enjoy until a future date. If you make a gift of a future interest to someone other than your spouse, even if it is less than the annual exclusion amount, you must file a gift tax return;
  •  You are making the gift splitting election with your spouse to treat all gifts you made (while married) as having been made by each of you separately for half of the total amount; or
  •  A transfer is made to a trust, even if the transfer is below the annual exclusion amount, a gift tax return may be required.
Will I owe a gift tax?
It depends on how much you've already gifted during your lifetime. The IRS allows you to make up to $11,180,000 (2018 amount, adjusted annually for inflation) of gift tax-free transfers during your lifetime. This is referred to as the lifetime exemption amount. If your current year taxable gift(s) plus all prior taxable lifetime gifts are less than the lifetime exemption amount, you generally will not need to pay gift tax on the current transfer. Keep in mind that gifts that are less than the annual exclusion amount are not counted as taxable gifts.

For example, you decide to gift $25,000 to your daughter who is getting married. Assuming you are not married, the first $15,000 of this gift would be covered by your annual gift tax exclusion. You could then apply $10,000 of your lifetime exemption to make the gift tax-free.

How did the 2018 Tax Cuts & Jobs Act affect gift taxes?
  • Both the gift tax and generation-skipping tax (GST) lifetime exemption amounts were increased to $11,180,000 per person ($22,360,000 per couple). This is a significant increase from the 2017 lifetime exemption amounts of $5,490,000 per person.
  • The Federal tax rate on transfers in excess of the lifetime exemption amount will remain at 40%.
  • A spouse’s unused gift tax lifetime exemption amount can still be ‘ported’ to the surviving spouse via the portability election.
  • Basis step-up at death remains in place so careful consideration should still be given to which assets are chosen for lifetime gifting.
  • The 2018 Tax Cuts & Jobs Act estate, gift and generation-skipping transfer tax (GST) changes are slated to sunset at the of end of 2025 so this means that, as of January 1, 2026, the lifetime gift tax and generation-skipping tax (GST) exclusion amounts are set to return to $5,000,000 (plus inflation adjustment) per person. Current estate plans should be reviewed, and thought should be given to taking advantage of the larger exemption amounts during this defined time period.
Are there any State gift tax considerations?
  • There is currently one state that imposes a gift tax – Connecticut. Other states only impose an estate and/or an inheritance tax but the estate or inheritance tax calculation may incorporate lifetime gifting (i.e. Illinois) so this factor should be considered when making lifetime gifts.
I transferred money to a 529 plan for my child. Do I need to file a gift tax return?
A contribution to a 529 plan on behalf of a designated beneficiary is considered a gift of a present interest that does not qualify for the educational exclusion. As a result, if the transfer to the 529 plan plus any other gifts to that donee during the calendar year are in excess of $15,000 a gift tax return filing will be required.

The IRS does allow a donor to make an election on the current year gift tax return to spread a 529 Plan gift ratably over five years (if the gift exceeds the annual exclusion amount after splitting), recognizing 20% of the total gift amount per year for gift tax purposes. This election allows a donor to front load a 529 Plan and take advantage of a longer period of tax-free growth. In order to make this election, a gift tax return must be filed.

I made a transfer to an irrevocable trust. Do I need to file a gift tax return?
  • Filing a gift tax return should be strongly considered even if the transfer was less than the annual exclusion amount and the beneficiaries of the trust have a present interest (Crummey powers) in the transfer amount. This is because there are likely generation-skipping transfer tax (GST) ramifications and allocations that need to be made on a timely-filed gift tax return.
What should I consider at the end of the year related to gift tax?
The most basic question to consider is: How much have I gifted so far in 2018 to a given donee or trust and should I be making any additional gifts to this donee to utilize all of my annual exclusion for 2018 ($15,000 per donee; $30,000 if gift-splitting is being elected)?

In addition, the increase in the lifetime exclusion provided by the Tax Cut and Jobs Act has provided many taxpayers, particularly business owners, a unique opportunity to do estate and business transition planning.

For example, business owners may want to consider gifting shares of stock in their family-owned business to their children. Such gifts of minority interests also have the benefit of potentially qualifying for discounts in value for lack of control and/or marketability. If a taxpayer is considering making such a gift, they should consult a valuation expert in order to obtain a formal appraisal to support these discounts.

Taxpayers with large life insurance policies may also want to consider establishing an ILIT (Irrevocable Life Insurance Trust). Through the use of an ILIT, a taxpayer can transfer ownership of an existing life insurance policy to a trust for the benefit of his or her heirs and remove the life insurance proceeds from their estate. The trust must be an irrevocable trust, meaning that the owner no longer retains any control over the assets in trust.

Another variation on the use of an ILIT is for an individual to gift cash to the ILIT in order for the trust to purchase the insurance policy and pay premiums. Even though both the lifetime gift and GST exemption amounts are currently at $11,180,000, individuals with life insurance policies with coverage in the millions and who also own businesses or real estate can often have a net worth in excess of these limits. Removing a life insurance policy from an individual’s estate at its pre-death value can help ensure that the total estate value is below these limits. As noted earlier, it is important to note that the lifetime exemption amounts return to $5,000,000 (plus inflation adjustment) as of January 1, 2026 so time may be of the essence.

To learn more about the family wealth planning services, please contact Cathy Johnson with The Bonadio Group and Asher Mendelsberg with Topel Forman.

We’re great alone, but we’re “Moore Together!” If you would like to collaborate with other members, or if you have a topic you would like to address, please contact Laura Ponath.