Some people think that if they have an estate that is potentially subject to Washington or federal estate tax, they can simply gift their money to their children to reduce the size of their taxable estate. So long as they follow the rules, they can indeed do just that.
What are the basic rules about gifting? In 2017, just like in 2016, you can give an “annual exclusion gift” of $14,000.00 per year to an individual recipient (the “donee”). If you gift a greater amount than that, you will need to contact your CPA for assistance in filing IRS Form 709, which is the Gift (and Generation-Skipping Transfer) Tax Return. I recommend that you contact your estate planning attorney and CPA before making any gift larger than the annual exclusion amount, so you understand the rules and how that gift could impact your overall estate plan. Please keep in mind that these rules do not apply to charitable gifts. You will be able to reduce your taxable estate to a great extent by making charitable donations of any amount.
Fortunately, there’s no limit to the number of annual exclusion gifts you can make, so long as the donees are all different. You and your spouse can “double” your gifts since each of you can individually give $14,000 per donee. If you and your spouse have three children, you can cumulatively give each child $28,000, for a total of $84,000 in 2017, as annual exclusion gifts. As you can see, these amounts can add up quickly and, along with some charitable giving, provide a good option for reducing your estate so as to avoid or eliminate estate tax. The donees do not have to be your children, nor do they even need to be a relative.
What should you keep in mind when gifting? First, be sure to keep good financial records so that, in the event of audit, the existence of the gift can be easily demonstrated. Second, if your gift involves an asset other than cash, such as shares of stock, art, jewelry, etc., obtain documentation demonstrating the fair market value of the gift. Be sure to speak with your CPA on this point because the concept of fair market value can be complicated depending on the nature of the gift. Third, a gift means a “completed” gift. A completed gift is an actual transfer of cash or other asset so that you can no longer control it. Sometimes folks want to get fancy and put so many strings around the gift so that, legally, it’s actually not a completed gift. If you have any desires to attach strings to your gift, please chat with your estate planning attorney first to determine if those strings are in fact allowable.
As long as you follow the rules, please feel free to gift away in 2017! It’s a new year and a clean slate for your annual exclusion gifts.
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