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We typically advise clients to think of the value of the gift before making gifts. Let’s take a look at why.
Value of the Gift
Although the annual exclusion from Federal gift taxes is $15,000, this doesn’t mean that you will be taxed on any gift greater than $15,000 in value. If you make a gift of more than $15,000 to one donee, then you will need to file a Federal Gift Tax return (IRS Form 709) to report the gift. The amount of the gift over the $15,000 will reduce your unified estate and gift tax exemption ($11,580,000 in 2020) and will only be subject to gift tax if you have already gifted up to the unified exemption. Any reduction in the unified estate and gift tax exemption could be relevant to your taxable estate when you die.
If you do not have, or expect not to have, $11,580,000 in your taxable estate then the gift reported on the IRS 709 will not result in a gift tax liability in the year you make the gift or result in an estate tax liability.
Gertrude made gifts of $20,000 to each of her five daughters and made gifts of $10,000 to each of her 13 grandchildren in 2020. She will need to file a Federal Gift Tax return (IRS Form 709) by April 15, 2021, and report the amount of the gifts to each donee that exceeded the annual exclusion amount (i.e., each gift in excess of $15,000) In Gertrude’s case, she would report the five gifts of $20,000, less a credit of $15,000 for the annual exclusion amount, for a net taxable gift of $5,000 to each of her children. The total taxable gift would be $25,000 ($5,000 x 5). This will reduce her unified estate and gift tax exemption by $25,000. If she has never given a gift to any donee greater than the annual gift tax exclusion, then her remaining unified exemption in 2020 $11,555,000 ($11,580,000 – $25,000).
The gifts to the grandchildren will not be reported on the gift tax return and will not reduce her unified exemption since they were less than the annual exclusion.
As always, please reach out to an experienced estate planning attorney to help you navigate these types of scenarios.