The Gift That Keeps on Giving…

Gifts may come in a lot of different forms: you may be helping someone out with a bill payment, putting property into someone else’s name in order to avoid probate, or giving a no-strings attached offer to someone.  Regardless of the nature of the gift, if you are providing someone with something of value without expecting repayment, it is important to consider whether there are gift tax implications.  But, beware, in most cases no tax will be due until much, much later, if at all!

The current gift limit is $14,000 per year.  The amount is calculated as a “per donor – per donee” amount, meaning that you may give $14,000 to as many people as you like (and so may your spouse) or you may receive $14,000 from as many people as will give it to you without the necessity of an gift tax return.  However, if you give more than the limit to a single person, you must file a return with the IRS.  Failure to do so can carry hefty penalties.

Once you file the return, typically no tax is due with it.  The gift tax is tied with the estate tax and may, therefore, increase the amount of estate tax that will be due upon your death.  For this reason, you should retain all previously filed gift tax returns in a safe place.  However, it is typically not necessary to pay immediately.  Furthermore, if your estate is small enough that estate tax is not a concern to you, then the gift tax is also not a concern because no tax will ever be due on the gift!  Of course, this is not to say that you shouldn’t consider whether the gift is prudent or what implications may otherwise exist.  For example, if you are giving away real estate in order to avoid probate, it may be more beneficial to receive the step-up in basis that comes after death, prevent reassessment on the property for property tax purposes, or other considerations.  It may also be beneficial to give a gift in some other form than an outright check.

If the transfer is not a gift because you do expect to be repaid (i.e. it is a loan), then it is extremely important to document the transaction, particularly with family members.  Otherwise, you may run the risk of having the loan re-characterized as a gift for tax purposes.  Furthermore, if the loan is not properly accounted for in your estate plan (and funded into your trust), it is possible that the balance may not be collected or that the loan, which is an asset, will cause a probate!

Any time you are making a large financial transaction, it is important to get advice about how the transaction will affect other areas of your financial life.  Although it is often uncomfortable to get lawyers involved with family interactions, it is really the best route to protect everyone’s best interests and ensure that the goals of the transaction are being met.  At a minimum, disclosing to your estate planning attorney whether you have made any substantial gifts or loans can ensure that the gifts or loans are treated appropriately according to your wishes when necessary.

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