As we approach the end of 2017, it is important to note that a very powerful asset transfer technique is available but time is running out. The following information applies if a donor (the person making a gift) and donee (the recipient of a gift) of the gift are United States citizens.
A donor can make a gift to a donee of up to $14,000 without incurring gift tax or reducing the lifetime exemption amount for gifts and estates (currently, $5,490,000 per person and $10,980,000 for a married couple but will increase to $5,600,000.00 per person and $11,200,000.00 for a married couple in 2018). Practitioners refer to this exclusion as the annual gift tax exclusion. The annual gift tax exclusion is periodically indexed for inflation. While it has remained at $14,000 since 2013, it will increase to $15,000 on January 1, 2018. As such, married individuals can make gifts of up to $28,000 in 2017 and $30,000 in 2018 to an individual without incurring gift tax or reducing the lifetime exemption amount or filing a gift tax return. This annual exclusion is authorized pursuant to 26 U.S.C. 2503(b). During this calendar year, a donor can make annual gifts of up to $14,000 to as many donees as he or she chooses. A donor may not, however, gift more than $14,000 this year to any individual except a spouse without filing a gift tax return and reducing his or her lifetime exemption amount. Gifts in excess of $14,000 during this calendar year will reduce a donor’s lifetime exemption amount. The same will hold true in 2018, except that the annual gift tax exclusion will become $15,000.
For example, assume that Mom and Dad are United States citizens, have exhausted their lifetime exemption amounts and have three children, each of whom are married with one child. On December 31, 2017, Mom and Dad may each utilize their annual gift tax exclusions and on January 1, 2018, they may make additional gifts of $15,000 to each of their children, their children’s spouses and their grandchildren. Therefore, Mom and Dad can, between now and January 1, 2018, cumulatively gift $58,000 to each of their three children, their children’s spouses, and grandchildren resulting in $522,000 of gifts in the aggregate and $174,000 per family unit. In a matter of a few days, $522,000 of transfers may be completed without incurring gift tax. Now assume the same facts but the gift is not a present interest gift (meaning the recipient does not have immediate control of the gift or the immediate ability to use the gift). In that scenario, as mom and dad had previously exhausted their lifetime exemption amounts, the donor will be responsible for paying gift tax on the entire $522,000 at the rate of forty (40%) percent, resulting in a gift tax payable of over $208,000 on or before April 15, 2018.
Gifts of appreciated assets, such as stock, retain the tax basis of the donor. For example, assume David purchases 100 shares of stock of Company X (“Stock”) in 2012 for $12,000. Assume David then transfers all 100 shares of Stock to his daughter, Tina, on Dec. 1, 2017. On the date of transfer, the value of the stock is $24,000. David successfully transferred $24,000 of assets without triggering the gift tax. However, if Tina sells the Stock in the future, Tina will have a taxable long-term capital gain of $12,000 that will be subject to capital gains tax.
There can be many unforeseen challenges incident to making gifts. For example, gifts that are completed within 60 months of an application for Medicaid eligibility are deemed transfers for less than fair market value and trigger a penalty period of ineligibility for Medicaid purposes. Annual exclusion gifts are not exempt from the transfer for value rules.
Before making any substantial gifts, you should seek guidance from a skilled tax attorney or you may incur very costly unintended consequences.
Michael Salad is a partner in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on estate planning, business transactions, mergers and acquisitions, tax matters and cyber risk management. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in New Jersey, Florida and the District of Columbia. Michael may be reached at 609.572.7616 or via e-mail at firstname.lastname@example.org.
Jarad Stiles is a member of Cooper Levenson’s Business, Tax and Estate Practice Groups. He focuses on estate and corporate tax planning, mergers and acquisitions, business succession planning, probate administration, tax litigation and elder law. Jarad holds an LL.M. in Taxation. Jarad is licensed to practice in New Jersey, New York, and the United States Tax Court. Jarad may be reached at 856.857.5994 or via e-mail at email@example.com.