Dear Liza: My friend has a stock portfolio she wants to give me before she dies. She had cancer and only has a few months to live. She wants to give it to me now to avoid the whole estate thing. The total is about $220,000. Do I have to pay gift tax if she transfers the portfolio to me in kind? I am sorry to hear that your friend is so ill. She can give you that portfolio, but it might not be the most tax-effective way to do it. If she gives you the portfolio before she dies, she (or her estate) must report the gift on a gift tax return by April 15th of the following year. She won’t owe any gift tax on the transfer, because in 2012, each of us can give up to $5.12 million dollars free of gift tax, but any gift over the annual gift tax exclusion amount of $13,000 must be reported on that gift tax return. If you later sell any of that portfolio, though, you will owe capital gains taxes on the difference between your friend’s basis in that stock and the sales price. For example, if your friend owned stock in Y Corp., that she purchased for $1 dollar a share in 1982, and that stock is worth $100/share in 2013, you will owe capital gains on that $99/share rise in value. Alternatively, if she gives you that portfolio upon her death, you will inherit it at the current fair market value for capital gains tax purposes. In other words, if that Y Corp. stock is worth $100/share when your friend dies, and you later sell it at that price, you will owe zero in capital gains taxes. That portfolio will, however, be part of her taxable estate at her death, so, depending upon her other assets, her estate may or may not have to pay estate tax on those assets. (Currently, she can give up to $5.12 million at death free of estate tax.) So, you and your friend should seek the advice of an accountant to see whether it makes sense for your friend to give you that stock via a Will or a trust upon her death, or during her lifetime.
Category Archives: Gift tax
Hi Liza, I read from FAQ on the nolo website, “The $5 million exemption applies to property you give away during life or leave at your death. In other words, you can transfer, either while you are living or at your death, up to $5 million of property tax-free.” So, does it mean that I can pass a $1 million house to my children without any costs? now? If yes, what time is used as the tax basis? Yes, until the current law expires at the end of 2012, you could absolutely give that house to your children free of gift tax. But they would also get YOUR basis in the house for capital gains tax purposes. In other words, if you purchased that house for $25,000 in the 1970’s and now it’s worth $1 million, if you give that house to your kids, and they sell it, they will owe capital gains taxes on all of that gain. If you give them the house only upon your death, their basis in that property would be the fair market value of the property at your death, so all of that gain goes away. If you make the gift now, also, don’t forget to file a gift tax return by April 15th of the following year. You are still required to file that return, even though no tax is due.
Dear Liza: Does a gift to a living trust (with children and grandchildren – total of 9 beneficiaries) take a total of $13k annual exclusion or is the annual exclusion based on the beneficiaries? Good question. Before I answer it, a little background for my loyal readers: the annual exclusion is the amount of money you are allowed to give to someone free of gift tax. As we reach the end of the year, now is a good time to make such gifts, since each year you get a new exclusion to use. These annual gifts are in addition to the amount of money you are also allowed to give away free of gift tax over your lifetime (currently $5 million). By skillfull use of the annual exclusion, you can transfer a lot of money to those you love without ever having to use up that lifetime exclusion–it’s a great idea, if you can afford it.
You are allowed to give $13,000 free of gift tax to EACH recipient each year. So, one person could, if they wanted to, give each person in their city $13,000 (or less) without having to report any of the gifts. However, if any one gift is more than $13,000, all of the gifts would have to be reported on a gift tax return by April 15th of the following year. And, a gift has to be a completed gift to count–a gift to a living trust is not a completed gift (because the donor could always revoke the trust at a future point). That’s why, if a person wants to make annual gifts to children and grandchildren in trust, that trust has to irrevocable and has to be what’s called a “Crummey Trust”–which means that each beneficiary has a certain amount of time to withdraw that annual gift after it is made. If they don’t (and, of course, they don’t), the money stays in trust and the donor gets to use that annual exclusion from gift tax for each trust beneficiary.
Dear Liza: I want to buy a home in Arizona and my Mom wants to loan me the 40k for my 20% down. It’s from her savings account. My broker said she should do a letter saying she is “gifting” it to me. She lives in California. Will this cause her any issues with the IRS? can she loan it instead? Your Mom can give you the money or loan you the money, it’s up to her. If she gives you the money, she will need to file a gift tax return next year. But, she won’t owe any gift tax because each person is currently allowed to give (I kid you not!) five million dollars, free of gift tax. Her 40K gift to you will mean that she only has $4,960,000 left of her lifetime gifting credit. This shouldn’t cause her major trouble, right? If, instead, she’d rather make a loan to you, she can do so. But the loan should be in writing, the interest rate must be at least equal to the published federal rate (AFR) for that month, and the loan should be secured by the property. Here’s a good article on family loans that you might find helpful.
Dear Liza, My Dad recently gave me a gift of $13,000. Do I have to report this on my income tax return next year? Nope. Gifts are not considered ordinary income under the US tax code. So, you don’t have to report the gift. If there’s any tax to be paid, it is paid by the gift-giver (in tax-speak, the ‘donor’), not by the recipient (in tax-speak, the ‘donee’). However, your very nice Dad just gave you the maximum amount that he can give to any one individual each year without having to report the gift (in tax speak, this is an ‘annual exclusion gift’), so you are both completely within the law, and the transaction is entirely tax-free. Nicely done!