Gift Tax for 2007
Gift Tax for 2007
Volume 2007 / Issue 2
October 19, 2007
For 2007, each taxpayer is allowed to make gifts of up to $12,000 to each recipient before they incur any adverse tax impact. Gifts in excess of this annual exclusion are first applied against the donor’s $1,000,000 lifetime exemption. Any gifts in excess of the lifetime exclusion will create a current gift tax liability.
There are several reporting and planning matters that you should be aware of when contemplating a gift. The information below provides a brief overview of the gift tax basics that you may want to consider before year end:
- For appreciated assets, the tax basis and holding period of gifted property remains the same for the recipient as it did in the hands of the donor. Therefore, depending on your specific circumstances and intentions, it may be more beneficial to select high basis or low basis property to gift.
- For depreciated assets, the recipient’s basis is the fair market value on the date that the gift is completed. In such situations, the donor should consider whether selling the property first would allow him or her to claim a tax loss, and then gift some or all of the sale proceeds instead.
- Together, a husband and wife may make gifts to each recipient of up to $24,000 without any reduction to their lifetime exemption or incurring any gift tax. However, if the gift is made with property owned by one spouse, or out of an account in the name of only one spouse, then a gift tax return should be filed with a gift-splitting election, which will treat it as coming 50/50 from each spouse.
- In order to qualify for the $12,000 annual exclusion, the recipient must have a present interest in the gift (i.e., he or she must have control over the property once the gift is completed). This can be a problem for gifts made into a trust that contains restrictions on when the beneficiary is eligible for distributions. However, this present interest requirement can be satisfied by giving the recipient a limited period of time to request a distribution of the gift (Crummey power – named after the taxpayer in the court case in which it was first tested). It is important that the trustee issue a “Crummey letter” informing the beneficiary of his or her right to withdraw the contribution. The $12,000 annual exclusion is not available for gifts of future interests (one in which the recipient’s use, possession or enjoyment of the property or the income from it does not commence immediately upon its transfer).
- Gifts for tuition or medical care (including health insurance) do not count against the annual gift exclusion, which provides an opportunity to transfer additional wealth on an annual basis. However, the payment for tuition and health care expenditures must be made directly to the educational or medical institution (gifts to the recipient to be used for educational or medical expenditures will not qualify). The tuition exclusion includes private grade school and post-secondary education, but does not include books, room and board, supplies, etc.
- Gifts to a qualified higher education plan (Section 529 plan) of up to $60,000 ($120,000 for married taxpayers) can be made without any adverse consequences, if the taxpayer makes an election that will treat this gift as being made evenly for the current year and the following four years. However, additional gifts during this period may be limited and a gift tax return must be prepared in order to make this election.
- The value of a gift is based upon the fair market value of the property on the date of the gift. This is an easy exercise when the gift consists of cash and/or publicly traded securities, but becomes much more difficult when it deals with collectibles, artwork, real estate, shares of non-publicly traded business, etc. Such gifts will require greater planning and an appraisal.
- A 2007 gift tax return is not required if the value of all gifts made to each recipient during the year do not exceed $12,000. However, there may be circumstances where you should file a gift tax return in order to report the value and start the running of the statute of limitation. This is particularly helpful when making gifts of property where the determination of value is subjective and open to challenge by the IRS (i.e., collectibles, artwork, and privately held businesses).
- If properly structured, certain gifts (usually shares in a non-publicly traded company or units in a family partnership) may qualify for discounts based upon a lack of control or marketability. These gifts can be a powerful estate tax planning tool, but require significant planning and must be constructed properly in order to obtain the intended benefits.
- Gifts of remainder interests may also provide an opportunity to report a gift at a value considerably less than its actual fair market value. One common example would be a qualified personal residence trust, which allows a taxpayer to transfer their personal residence, but retain the right to use it for a specific number of years. Because the remainder beneficiary must wait until several years before he/or she can take possession of the property, a discount is applied, which may significantly reduce the value of the gift. This arrangement can be complex and proper planning is critical in order to obtain the intended benefits.
- Making gifts in excess of the $12,000 annual exclusion does not trigger a tax liability unless that person has already utilized their $1,000,000 lifetime exemption. This can be a valuable estate tax planning tool in certain circumstances, especially if you own property that you expect to appreciate significantly.
- Certain gifts are easy to miss, but should be considered when determining whether you are required to file a gift tax return for 2007. These gifts include “normal” recurring gifts that you may give someone on their birthday or a holiday, contributions to educational savings plans, life insurance premiums paid (a deemed gift to the beneficiary), payment of living expenses (unless the recipient is a dependent), making debt payments on behalf of another, etc.
- Loans made below market rates, free rent or below-market rent, sales of property at less than an arms-length price, etc. all may be considered gifts to the extent that the market rate exceeds the actual charged rate.
- Be careful when advising elderly parents to gift their assets away in order to qualify for Medicaid assistance. There is a five-year look-back period where benefits may be reduced, and there is no tax basis step-up to fair market value at their death. Furthermore, if their primary residence is gifted away, any gain on its subsequent sale will be taxable, as the property will no longer qualify for the home sale exclusion.
Gifting can be an attractive strategy when trying to help a loved-one or transferring wealth for estate tax or Medicaid planning purposes. The analysis above was meant to provide a high-level overview of some basic gift tax planning matters, and should be discussed in greater detail if you have made any gifts during 2007 or plan to do so before year end.