Q:

Subject:  Gift tax question

Hello:  I read your blog, but could not figure out how to ask you a question.  My 90 year old mother died in 9/2007.  Prior to her death she had been gifting $12,000 per person and paying tuition directly to institutions.  The estate has not yet settled because the executor asked for an extension.  I just received my tuition bill for $11,000.   1) Do the $12,000 per person gifts continue after death, and 2) do the tuition payments continue after death?  When you answer, could you point me to the appropriate IRS literature?  Thank you,

A:

This isn’t really a tax issue that you are dealing with.  It is more of an estate settlement issue that you need to work out with the attorney and executor who are handling the disposition of your mother’s estate. Some of the exact answers will depend on the rules for your mother’s particular state of residence when she passed away.

Basically, when a person passes away, her ability to make gifts terminates at the same time.  So, the annual gifts your mother was giving you can’t continue.

however, this is when her will or living trust kicks in.  She may have left you a lump sum of money to use to continue your education or she may have designated that a trust be established for your benefit, out of which your tuition will continue to be paid.  Both of these, as well as other variations and combinations, are common estate planning scenarios.

Again, you need to consult with the attorney and executor to see how you will be affected.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry: Thank you so much for your response!  I thought that her ability to gift died with her, but I could not find anything that actually said it.  Sincerely,

Q:

Subject: Tax Free Gift

The maximum tax free gift for 2007 was $12,000 per individual. Is this the same for 2008?

 

Thank You.

A:

 Yes it is.

By law, this figure is only allowed to be increased in even $1,000 increments; so it takes a number of years’ worth of cumulative inflation before it is bumped up.

Kerry Kerstetter

Q:

Subject: Cash Gifts

My 90 year old grandfather has been giving my brother and I $11,000 each for the past 2 years. I do his taxes but have not been showing these payments on his tax return as he does not itemize. How do I show these as cash gifts? Do I have to itemize to do this?

 

Thanks for any advice or tips you may have.

A:

Gifts are not shown anywhere on income tax returns, either for the giver or the recipient.  They are not deductible by the giver, nor are they taxable income to the recipients.

The Gift Tax system is actually separate from the income tax system.  If your grandfather were to give any single person more than $12,000 during a calendar year, he would have to file a Gift Tax return (Form 709).  There are exceptions for certain other kinds of expenses, such as medical and education costs.

If he starts giving away more than the annual $12,000 tax free limit, he should be working with a qualified professional tax advisor.

You can see more about the Gift Tax on my website. 

Good luck.

Kerry Kerstetter

Q:

Sorry to bother you, but could you tell me if a husband and wife can EACH receive $12,000 (and stay within the legal limits) from the same donor, say one of the parents of the husband or wife?
 
Thanks!

A:

For gifting purposes, each person, including spouses, is subject to his/her own limits.  Thus, gift splitting between spouses has long been a standard tactic to essentially multiply the amount of wealth a husband and wife can transfer tax free to their kids and grandkids.

The annual maximum without requiring any need to dip into the million dollar lifetime exclusion is currently $12,000 from each donor (giver) to any one donee (recipient).  For example, say a married couple has a married daughter.  The father can give $12,000 to their daughter and another $12,000 to their son in law.  The mother can give another $12,000 to the daughter and another $12,000 to the son in law.  This makes a total of $48,000 that can be transferred tax free during each calendar year.  If there are grandkids, the older parents can also each give another $12,000 to each of their grandkids. 

Since gifts of any size or total amount are always tax free for the recipients, the potential gift or estate tax hit is on the donors (givers) if they give away too much.  Therefore, it is critical for them to work on any gifting and estate planning scenarios with their professional advisors.

There are also other aspects to consider, especially if the gifts are not of after tax cash.  Gifts of appreciated assets carry with them potential capital gains taxes on the recipients if and when they sell those items; so deciding exactly what is transferred is something that should be done with the assistance of professional advisors. 

FYI: Here is an excerpt from the QuickFinders Tax Planning For Individuals that covers this point.

Annual Gift Tax Exclusion

A taxpayer can give $12,000 per person (for 2007) to any number of recipients in a calendar year without paying federal gift tax. An unlimited amount can be given each year as long as no recipient receives more than $12,000. Gifts that qualify for this annual exclusion are never taxed­no gift tax is owed when the gift is made, and the gift is not taxed at death. If a gift is over $12,000, only the excess is a taxable gift. The annual exclusion is indexed for inflation and will change again when cost of living adjustments reach the next $1,000 multiple.

Present interest required. To qualify for the annual exclusion, a gift must be a present interest­the recipient must have all immediate rights to the use, possession, enjoyment and income of the property. The annual exclusion does not apply to a future interest­the recipient’s rights to benefit from the property begin at some future date. Most gifts to trusts do not qualify for the annual exclusion because they are gifts of future interests. Exceptions include gifts to a minor’s trust and gifts to a trust that includes a Crummey power.

Gifts from married couples. Each spouse has an annual exclusion. Couples can therefore transfer a combined total of $24,000 to a single recipient in 2007 and not exceed their combined annual gift tax exclusions.

Gift splitting. If a gift in excess of $12,000 is made by only one spouse, the couple can use both annual exclusions by filing gift tax returns electing to split gifts. A gift-splitting election applies to all gifts made by the couple in a calendar year and attributes one-half of each gift to each spouse.

Community property. Gifts of community property are considered for federal gift tax purposes as made half by the husband and half by the wife. This results not from gift splitting, but from federal recognition of the state’s community property rules. Thus, a gift-splitting election is not needed for community property gifts.

Qualified Transfers–Tuition and Medical Care

Direct payment of medical expenses or tuition for another person is not a gift for gift tax purposes [IRC §2503(e)]. Payment must be made to the school or medical provider and not to the beneficiary. The beneficiary of a qualified transfer does not need to be related to the taxpayer. A qualified transfer does not prevent the donor from making an annual exclusion gift directly to the beneficiary of the qualified transfer. Qualified transfers are not reported on Form 709.

Tuition. Tuition paid to primary, secondary, preparatory or high schools, and colleges and universities for another person qualifies for the tuition exclusion.

Payments for books, supplies, dormitory fees and board do not qualify. Tuition for part-time students qualifies.

Medical care. Medical payments can cover any type of expense deductible for income tax purposes, including payment of insurance premiums.

Transfers to QTPs

Contributions to a qualified tuition program (QTP) are not direct payments of tuition excluded from the gift tax as qualified transfers. However, these contributions are considered gifts of a present interest and are eligible for a special election spreading them over five years.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Kerry,
 
Thank you very much. This helps a lot!!

Q:

Subject: Questiion about the gift tax and exclusions

 

Hello,

    My sister and I have a question about the gift tax exclusions.

This year the max. gift is $12,000 per person annually. But there is a $1,000,000 “Lifetime exclusion”

My sister belives that means that the doner can give a lifetime of 1 million in gifts (which includes the 12k per person annually) and anything over that is taxed. But I think that the 1 million lifetime exclusion means that whatever is over the annual 12k per person is deducted from the 1million. So if someone is given 30k in one year as a gift – 18k (30-12) is deducted from the lifetime one million.

Could you please clarifry this for us?

 

Also, if the 1 million exemption is not reached by the time somone dies- can it be given after death without being taxed? on top of the 2 million Estate exemption from taxes?

 

Thank You so much,

A:

You really need to be discussing any kind of gifting program with your own personal professional tax advisor because there are many ways to accomplish whatever it is you want to.

However, I can clear up some of your misunderstandings.

First is the issue of gifts versus bequests.  Gifts are only made while a person is alive. Once the person passes away, gifts are no longer possible.  Bequests, per the instructions in his/her will or living trust, are the way items are passed from the deceased to whomever s/he wants to transfer things to. 

This is an important distinction because a person can give away up to one million dollars worth of assets above the annual tax free amount while s/he is alive.  If more than that is given while the person is alive, s/he must file a gift tax return (709) and pay gift tax to IRS.

After a person passes away, s/he is subject to the estate (aka Death or Inheritance) tax.  Under this tax system, the amount of the estate that is not subject to any estate tax varies depending on the year in which the person passes away.  As you can see on the chart on my website,   people passing on during 2007 have a two million dollar exemption. 

The way this interacts with the one million dollar lifetime gift tax exclusion is that, on the Estate Tax Return (706), the total amount of the lifetime gifts used during the person’s lifetime is added back to the gross estate’s value.  The net effect is basically to reduce the tax free exclusion from the estate tax.  For example, if $500,000 of tax free gifts had been used by someone who passed away in 2007, this would be added to the value of his taxable estate on the 706.  After reducing the estate tax by the credit for the $2,000,000 allowance, it works out to be the same as if he only has $1,500,000 eligible for exemption from estate tax.  The actual calculation is a little trickier than this, but it’s an easy way to understand the concept.

So, your concern about the unused portion of the million dollar lifetime gift allowance is moot.  Whatever hasn’t been used while the person was alive will end up resulting in a higher exemption from the estate tax.  For example, someone who passed away in 2007 without utilizing any of his million dollars in tax free gifts will have the full $2,000,000 available for his estate tax.

In regard to the annual gifting allowance and the lifetime exclusion, your explanation is the more accurate one.  Someone making gifts that don’t exceed the limit of $12,000 to any one person during any calendar year will not have to file any gift tax returns and will not have used up any of his/her million dollar lifetime allowance.

Someone who does give any single person more than the $12,000 during a single calendar year will have to file a gift tax return to report that and show how much of his/her lifetime exclusion is being used up at that time, as well as how much of the million dollars is remaining.  Only the amount above the annual allowance needs to be deducted from the lifetime exclusion.  As in your example, someone giving another person $30,000 during a single calendar year would only have to claim $18,000 as coming off of the million dollar lifetime exclusion.  Each person is required to keep a running tally of how much of that million dollars has been used up during his/her lifetime so that the person preparing the final estate tax return can show the final cumulative amount.

As I said at the beginning, there are a number of very common gifting strategies, such as gift splitting between spouses, loans and debt forgiveness, and dividing gifts up between different family members, that can easily allow people to avoid having to ever dip into their lifetime exclusion at all  These need to be planned out with the assistance of a professional tax advisor.

I hope this helps you understand this topic a little better and how important it is to have professional assistance before actually doing anything in this area.

Good luck.

Kerry Kerstetter

Q:

Subject: Re: Gifts Tax Free For Recipients

Good morning, Kerry.   I’m assuming the question had to do with cash gifts rather than of appreciated assets.  I’ve seen some surprised people when the recipients of appreciated assets were told that they received the basis of the donor.

 

In our charitable giving world, we tell people to, where possible, give cash to family and appreciated assets to charity.

A:

That particular email did have to do with cash; but you are correct in noting the carry-over basis aspect to non-cash gifts.

As I have discussed on a number of occasions, it is a bit more complicated than simply donating appreciated assets to charity.  Another part of tax and gifting plans often involves deciding which family member has the lowest tax bracket and either gifting or holding those assets so that person can sell them with the lowest tax bite. 

Thanks for writing.

Kerry Kerstetter

Q:

Subject: Re: Skirting Gift Limits

The following is, of course, a great technique.  However, I’d use your typical admonition to engage the services of a qualified tax professional to make sure that this arrangement doesn’t trigger the imputed income rules.

 

“A common technique used to get the cash into the childless couple’s hands now, without exceeding the limit, is to loan them the extra amount now and then forgive that debt in future years as gifts in those years.”

 

Thanks.

A:

That is absolutely right.  I would hope that, after years of warning people how dangerous it is to function without the assistance of competent professional tax advisors, it would go without explicitly stating that every time.  However, it doesn’t hurt to remind people of that fact once again.

Kerry Kerstetter

Q:

Subject: gift tax question

My mother will be selling property soon that I was supposed to inherit upon her death. I am supposed to receive the proceeds, but instead of her gifting me the property, I have been advised that she should sell the property in her name to pay lower capital gains rates and alternative minimum taxes than I would since my annual income is much higher and gift the after capital gains tax proceeds to me.

 

I was told that she could give a one time gift of up to $1,000,000 exempt from gift tax but subtracted from her eventual estate. In other words, for 2007 the gift of $1,000,000 would reduce her exempt estate taxes to $1,000,000 from the $2,000,000 current limit. I have been assured by my CPA that is the case, but I can find nothing online including IRS.gov that mentions anything other than a $12,000 annual exemption from gift taxes.

 

This deal is based on my ability to receive the after tax proceeds (approx. $850K) without any gift taxes being paid by my mother in addition to the capital gains taxes. If both capital gains taxes and gift taxes applied to these funds the government would end up with more of the proceeds than we would. I appreciate any advice you can share.

A:

You need to check IRS Publication 950.  It explicitly mentions the lifetime exclusion of $1,000,000.

Here is a link to that part on the web.

To see the entire Pub. 950:

Web-Friendly HTML

Downloadable PDF

Good luck.

Kerry Kerstetter

Q:

Subject: gift taxes

Hi,

So to clarify the gift tax law…….the recipient has no tax ramifications if the gift is over the legal limit. For instance if I gift someone 12,500 they have no responsibility for any tax on that money?

Thankyou,

A:

That is true in almost all cases.  However, if you give someone pre-tax money, such as an IRA or other retirement account, that money will be taxable to the recipient.  Every other kind of gift of after-tax money is completely free of income tax for the recipient.

However, the giver will have to file a gift tax return (709) to report gifts to any single person in any calendar year in which the total exceeds the annual exemption.

Also, be aware of the fact that gifts do not reduce the taxable income of the giver, a very common misconception that people have.

Before any large size gifting program is implemented, you should work with your personal professional tax advisor to ensure that you understand the rules and implications of what you are doing.

Good luck.

Kerry Kerstetter

Follow-Up:

thankyou

Q:

Subject: Question about gifting

I understand the $12,000 limit for individual gifting, but I have a scenario I would like your opinion.

What if parents want to gift equal amounts of money to their 2 grown children; both are married, but one has 2 children, the other no children? So for Family A (with 2 kids) the maximum gift is $96,000 while for Couple B (no kids) the maximum gift is $48,000. Now can Family A gift Couple B $24,000 so that each child has received $72,000 from the parents without any tax consequences?

A:

You wouldn’t believe how often that kind of re-gifting scheme comes up when people ponder ways in which to “out-smart” the annual tax free gifting limits. 

It’s not allowed and would be considered fraud if IRS were to discover it. A true bona-fide gift can’t have any conditions on it, especially that the money be given to someone else.

If you want to stay under the annual limits, there are a number of ways in which to accomplish the kind of equal distribution that you are desiring.

The simplest is to merely wait until the beginning of the next calendar year, when there is a new $12,000 per donor per donee limit available, and gift the childless couple the additional money.

A common technique used to get the cash into the childless couple’s hands now, without exceeding the limit, is to loan them the extra amount now and then forgive that debt in future years as gifts in those years.

There are also a few types of transfers that aren’t considered gifts subject to these limits.  The most common types are payments for medical and education purposes.  Depending on the circumstances involved here, if the parents were to pay for the childless couple’s college tuition and/or medical care, those amounts can be in addition to the $48,000 of direct cash payments.

As you can see, it can get tricky; so the services of a good professional tax advisor would be advisable.

Good luck.  I hope this helps.

Kerry Kerstetter
 

 
Follow-Up:

Dear Kerry,

Thank you for your answer. Your reply broke the tie. My CPA says the same thing as you did.

My father’s CPA says there is nothing wrong with the “scheme.” He says after you gift the money, the person receiving the money then makes his/her own gift to the 3rd party and he/she is allowed to. But I think that the spirit of the gift limits, and the intentions of the gifting is what is at issue.

Thanks again.