Tag Archives: annual exclusion

Where the Gift Tax falls

Dear Liza: Currently, I own 1/3 of a condominium. My mom owns 1/3 and and brother owns 1/3.  My mom and brother (both alive) want to change the title to just my name.  Do my mom and brother have to pay gift tax or do I have to pay gift tax?   I read on IRS.gov that $5 million free of gift tax during my lifetime is only for estate tax and 13,000 is gift tax each year. Don’t you have to be dead to receive estate tax? So many good questions here.  I will answer, with this caveat: if Congress makes a deal with the President, some of what I have to say may change. As of RIGHT NOW (December 30th, 2012), the donor of the gift (your mother and your brother) are liable for any gift tax due on the transaction, not the donee (that’s you). But, unless that’s one pricey condo, they’re not likely to actually owe any gift tax at all.
Until tomorrow, each person is allowed to give up to $5.12 million, free of gift tax.  This ‘magic  number’ currently applies to all lifetime gifts, or gifts made at death. That number is scheduled to go down to $1 million on January 1, 2013–but still, what that means is your mother and brother would have to file a gift tax return by April of the year following the gift and report the value of the gift (this will require an appraisal to document that value).  If the value of the gift is less than the available magic number, no tax is actually due (but they’ll have used up some of their lifetime ability to give free of gift or estate tax).
That $13,000 gift is called an ‘annual exclusion gift’ and it can be made entirely free of tax, each year, and as long as no gift to any individual exceeds the annual exclusion, no gifts need to be reported at all. The annual exclusion is scheduled to increase to $14,000 in 2013.
I can’t tell from your question where you live. But in California, where I practice, the gift you describe will also result in a partial reassessment of your property taxes,  so please make sure that you also understand the property tax issues raised by the gift you contemplate.

Annual Giving: The Time is Right

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.

Gift Tax Rules and Generous Dads

Dear Liza,  My aging dad desires to give me a cash gift ($200,000).  I have read the IRS info about him being able to give me $13,000 per year.  I also understand he could give my wife an additional $13,000 annually without either of us (giver or receiver of gift) having to report to IRS.  But what about a gift of $200,000, can he do that? Yes, he most certainly can. But I really understand your confusion. My clients get this mixed up often, too. Here’s the deal. You’ve got two gift giving concepts collapsed into one. First, you are absolutely correct that your Dad can give $13,000 to as many individuals as he choooses to, every single year, without reporting any of these gifts to the IRS. This is called the annual exclusion from the gift tax. But, if your father wants to give more than that in any year, he can do that, too. He’s also got a lifetime exclusion from the gift tax, and the amazing news is that this year (and next) this is equal to $5 million! To put it mildly, this should cover most of our gift giving ability, right? Your father can give you up to $5 million free of gift tax during his lifetime, or after his death, free of estate tax. He will need to report this gift on a gift tax return by April 15th of the year following the gift, but no tax will be due, provided he’s under that lifetime exclusion limit (which he is). Here’s another way to think about these two exclusions: the lifetime exclusion is sort of like a basketball clock, it gradually runs down as gifts are made during a donor’s life and reported to the IRS;  the annual exclusion is a gift that doesn’t even begin to run down that clock–you can make annual exclusion gifts every year without touching the lifetime exclusion.