Estate Planning 101: Gifts
By Tara Chabria

1. Intent to make a gift.
2. Delivery of the gifted property to the donee
3. Acceptance of the gifted property by the donee

Intent
An uncle makes a loan to a nephew and then forgives the loan. That is a gift. A parent sells assets to a child at a greatly reduced value. The difference between the sale price and the fair market value of the assets sold is a gift. Also you may have created a gift by placing your children’s name on your home. Any time you relinquish dominion and control over an asset without consideration, you have made a gift. 

Example: Assume Amari has a home worth $300,000.  He executes a deed deeding the home to himself, and to his daughters Jasmin and Sara.  Amari can no longer sell the house without the approval of Jasmin and Sara.  He has gifted one-third of the house to each of the two daughters.  He has made a gift of $200,000. 

Delivery and Acceptance
The second and third elements of a completed gift are delivery and acceptance. Executing a deed placing the daughters’ names on the home constitutes a gift. The deed is delivered, recorded and the gift is deemed to be accepted. You gave up dominion and control over property or you placed it in a structure which requires the signature of someone else in order for you to deal with the property. This constitutes a completed gift and gift taxes may be due

Gift Taxes
Gift taxes are imposed by both the federal and state governments.  The rules are similar but there could be substantial differences. Each of us can make tax free gifts to non-spouses.  The current exemption is $12,000 per year per donee without gift tax liability.  Thus, father can make a $12,000 gift to each of his children each year and incur no gift tax liability.  There is no income tax liability imposed on the children or the parent by making a gift. 

Marital Deduction
Some gifts are exempt from gift tax.  Because of the Marital Deduction, no gift taxes are imposed on gifts between spouses who are U.S. citizens.  There is no limit.  Thus, spouses can transfer property back and forth to one another without any gift taxes. 
 
Gift Tax Exemption for Federal Gift Tax Purposes

• Annual gift tax exclusion $12,000
• Estate tax exclusion $2,000,000
• Generation skipping $2,000,000
• Gift tax exclusion $1,000,000

Gifts Exceeding $12,000 a year
If gifts exceed $12,000 per donee per year, the excess is applied against your $1 million exemption for federal gift tax purposes. No federal gift taxes are due until this exemption is fully utilized.  Once this exemption is fully utilized, you can assume federal gift taxes at approximately 45 cents on the dollar. 

Income Tax Issues of Gifts
There is no income tax consequence of a gift.  A gift is not income to the donee.  There is no income tax deduction to the donor. Keep the following in mind:

The principal income tax ramification of a gift is that the donee retains the basis of the gifted property. Assume Amari buys stock in 1990 for $25 a share.  This year Amari gifts the stock to his daughter Sara. At the time of the gift the stock is worth $50 per share. Amari has made a gift of $50. Sara holds the stock for several months and then sells it at $60 a share. Sara will pay income tax on the $45 per share, (the difference between the $60 sale price and Amari’s cost of $15).  Sara’s income taxes when she sells the stock will be the same as Amari’s income taxes had Amari kept the stock and sold it himself. 

Basis Is Adjusted At Death
Because the cost basis is adjusted at death, had Amari held the stock until death and then willed the stock to son, son’s basis in the stock would have been the fair market value on the date of Amari’s death.  Then if Sara elected to sell the stock, she would have little or no taxable gain.  Thus, because inherited property receives a new basis, when considering what assets to gift, it is best to gift high basis assets rather than low basis assets. 

 At Death…not while living…Don’t Make The Gift!
In small estates, gifting can produce significant tax issues and problems.  Consider Amari who purchased a home in 1980 for $50,000.  The home is now worth $250,000.  Amari gifts the home to his son.  He is entitled to a $12,000 exemption at the time of the gift.  He applies the balance of the gift against his federal gift tax $1 million exemption and pays no federal gift tax. The home represents Amari’s principal asset.  His other assets total $200,000.  Amari lives in the home a few years, goes into a nursing home for a few months and then passes away.  Sara sells the home for $300,000.  Sara has a $250,000 capital gain ($300,000 sale price minus the $50,000 cost basis).  Under current income tax law, she pays about $37,500 in Federal Income Taxes. 

Had Amari retained the home and willed the home to Sara at death, Sara would have received a basis equal to the fair market value at death or $300,000.  Given that this is the major asset of Amari’s estate, there would be no estate tax and no inheritance tax.  Sara would have received a step up in basis in the home to $300,000.  She could then sell the home and pay no income tax. 

 Thus, in estates of under $1 million, gifting assets to children during your lifetime can often produce more dollars in combined gift and income taxes than could ever have been produced by the estate or inheritance taxes or the cost to probate Amari’s estate at his death.

 How Gifts to Minors Are Taxed
If you give an amount up to $12,000 to each child each year, your gifts do not count toward the million bucks of gifts you are allowed to give in a lifetime before triggering the gift tax. But what counts as a gift to a minor?

Gifts Made Outright To The Minor
Before making gifts of real estate or other property such as securities to minors…consult an attorney. If you find that gifts are suitable then consider gifting made through a custodial account such as that under the Uniform Gifts to Minors Act (UGMA), the Revised Uniform Gifts to Minors Act, or the Uniform Transfers to Minors Act (UTMA)
Note: One disadvantage of using custodial accounts is that the minor must receive the funds at maturity, as defined by state law (generally age 18 or 21), regardless of your wishes. Planning Note: Parent's support (child support) payments for a minor are not gifts if they are required as part of a legal obligation. They can be considered a gift if the payments are not legally required.

Estate Planning and Gift Tax Resources

• Internal Revenue Services at www.IRS.gov
• National Association of Estate Planners and Councils at www.naepc.org
• NAFEP -The National Association of Financial and Estate at www.nafep.com
• American Academy of Estate Planning at www.aaepa.com
• Estate Planning – AARP at www.aarp.org/estate_planning
• National Financial Planning Support Center at www.fpanet.org/public
• WealthCounsel at www.wealthcounsel.com
• International Tax Planning Association at www.itpa.org

Estate and Gift Tax Rates