Gifting Assets Now: Understanding the Tax Implications for You and Yours

Gifting assets during your lifetime can be a powerful tool for estate planning, allowing you to reduce the size of your taxable estate, support loved ones now, and witness the positive impact of your generosity firsthand. However, it’s crucial to understand the tax implications associated with gifting to ensure you’re making informed decisions and avoiding unintended tax consequences. While gifting can be beneficial, it’s not tax-free in all situations.

The primary tax to consider when gifting is the federal gift tax. It’s important to understand that the gift tax and the estate tax are unified, meaning they are part of the same tax system. The good news is that the gift tax system is designed to be quite generous, allowing most people to make significant gifts without ever owing gift tax.

The cornerstone of this generosity lies in two key provisions: the annual gift tax exclusion and the lifetime gift tax exemption.

The annual gift tax exclusion allows you to gift a certain amount of money or property each year to each recipient without incurring gift tax or even needing to file a gift tax return in most cases. This amount is adjusted annually for inflation. For example, in 2023, this annual exclusion was $17,000 per recipient. This means you could gift $17,000 to as many individuals as you wish—children, grandchildren, friends—each year without any gift tax implications. Crucially, this exclusion is per recipient. So, a couple could gift $34,000 to each child annually without gift tax consequences, effectively doubling the impact of the annual exclusion.

Beyond the annual exclusion, there’s the lifetime gift tax exemption. This is a significantly larger amount that represents the total value of gifts you can make throughout your lifetime and at death (through your estate) that are exempt from federal gift and estate taxes. This exemption is also subject to change and is currently very high. For example, in 2023, the lifetime exemption was $12.92 million per individual. This means that most people will never exceed this exemption amount in their lifetime.

If you make a gift that exceeds the annual exclusion to any one person in a calendar year, you are generally required to file a gift tax return (IRS Form 709). However, filing a gift tax return doesn’t necessarily mean you owe gift tax. It often simply means you are using part of your lifetime gift tax exemption. You only actually pay gift tax once you have exceeded your lifetime exemption amount, which, as mentioned, is very substantial for most individuals.

Another important tax implication to consider is the basis of the gifted asset. When you gift an asset, the recipient generally takes your basis in that asset. This is known as “carryover basis.” For example, if you bought stock for $10,000 and gift it to your child when it’s worth $20,000, your child’s basis in the stock will be $10,000. If your child later sells the stock for $25,000, they will owe capital gains tax on the $15,000 gain ($25,000 selling price – $10,000 basis). This is different from inheriting an asset, where the beneficiary typically receives a “step-up” in basis to the fair market value at the date of death.

It’s also worth noting certain types of gifts are generally excluded from gift tax, regardless of amount. These include:

• Gifts to your spouse: Gifts to a U.S. citizen spouse are generally unlimited and tax-free due to the marital deduction.
• Gifts to charities: Gifts to qualified charities are deductible and not subject to gift tax.
• Direct payments for medical or educational expenses: Paying tuition or medical bills directly to an educational institution or healthcare provider on behalf of someone else is generally not considered a taxable gift.

In summary, gifting assets during your lifetime can be a valuable estate planning strategy. While gift taxes exist, the annual exclusion and substantial lifetime exemption mean that most individuals can make significant gifts without ever paying federal gift tax. However, understanding the rules, particularly regarding the annual exclusion, lifetime exemption, gift tax return filing requirements, and basis considerations for recipients, is essential. For more complex gifting strategies or if you are concerned about exceeding the annual exclusion or lifetime exemption, consulting with a qualified estate planning attorney or financial advisor is always recommended. They can help you navigate these rules and ensure your gifting strategy aligns with your overall financial and estate planning goals.