GIFTING AND THE FEDERAL GIFT TAX

                                                                             by

                                                              Attorney Jack Cashman

                  For additional information: link to Radosevich, Mozinski, Cashman & Olson LLP

Many people want to pass their earthly possessions on to their relatives. There are two ways to do this: 1) a gift during their lifetime, or 2) at death. For a number of reasons, some may want to transfer property prior to their death, rather than waiting until they die. These reasons could be to avoid estate tax at death due to the size of their estate, because a relative has a unique need now, or simply because they want the recipient to have the gift early.

Transfers of property are only considered gifts, and therefore subject to the federal gift tax, if the recipient does not pay 'fair market value' for the property. This is true whether the property is real estate, an appliance, stocks or bonds, or whatever. However, a property transfer is only subject to the gift tax when the gift is complete, that is, when the donor (the one who makes the gift) no longer has the power to change its disposition. Transfers to spouses or to recognized charities are not considered gifts for gift tax purposes.

For tax year 2009, annual gifts of $13,000 or less to a particular person in a calendar year are not taxable or reportable for either the person who makes the gift (donor), or for the person who receives the gift (donee). These gifts are often referred to as annual exclusion gifts. A donor can make these gifts to as many different people in the same calendar year as he or she wants. The only limitation is that the total gifts to any particular person cannot exceed $13,000 per year without implicating the federal gift tax. A married couple, however, can make a non-taxable gift up to $26,000 to an individual by splitting the gift: each spouse is considered to be giving $13,000 of the gift. A married couple can also make a gift to another married couple of up to $52,000 without the gift being taxable or reportable. For example, Mom and Dad could gift up to $52,000 to their son and daughter-in-law without being affected by the gift tax.

If a person makes a gift in excess of the annual exclusion, the person making the gift must file a gift tax return (IRS Form 709) by April 15th of the year after the gift was made. The donor must report all previous reportable gifts on the form. However, until the total cumulative taxable gifts made by the donor exceeds one million dollars, there will be no gift tax owed. Any gift tax which may be owed is the responsibility of the donor.

There are several other cash transfers that are exempt from the gift tax. Paying medical expenses or tuition for someone else is not a gift for gift tax purposes. However, payment must be made directly to the school or medical provider - not to the beneficiary. As an example, a grandparent could pay his or her grandchild’s tuition, provided the money goes directly to the college, without effecting the ability to separately give the grandchild an additional $13,000 in gifts during the same calendar year. However, payments for room and board, books and supplies are not exempt from gift tax. Exempt medical payments can be for any type of medical expense which would be deductible for income tax purposes, including payment of health insurance premiums.

For people with larger estates, a gifting plan taking full advantage of the annual exclusion may be an important means of passing assets on to the next generation while lessening the potential federal estate tax bite.

                For additional information: link to Radosevich, Mozinski, Cashman & Olson LLP