Armanino Blog

Gifting Exclusions, Part 2: A Case Study

by John Karls
February 10, 2017

In a previous article, we looked at gifting exclusions for payments of tuition and medical expenses. In this article, we use a common fact pattern to illustrate the gift tax arithmetic of simple gifts, the use of the annual exclusion, and the requirement to file a gift tax return.

The situation: Mom and Dad are in their late 50s and have accumulated wealth during their marriage (community property). In addition, Mom recently inherited $200,000 from her father (her separate property). Their son Sam and his wife Bitsy are about to buy their first home. Mom and Dad wish to give them $100,000 to assist in this purchase.

Six options for the gift
This seemingly straightforward economic intention can be accomplished in various ways, which have different implications for gift tax reporting purposes:

  1. Mom and Dad can give $100,000 of their community property to Sam.
  2. Mom and Dad can give $50,000 of their community property to Sam and $50,000 of their community property to Bitsy.
  3. Mom can give $100,000 of her separate property to Sam.
  4. Mom can give $50,000 of her separate property to Sam and $50,000 to Bitsy.
  5. This is the same as #3, except that here Dad elects to “split” the gifts made by Mom.  This means he elects to treat these gifts as coming 50% from him for gift tax reporting purposes, even though they really came from Mom’s separate property.
  6. This is the same as #4, except that here again, Dad elects to split the gifts made by Mom, treating them as coming 50% from him for gift tax reporting purposes.

The annual gifting exclusion amount has been unchanged at $14,000 per donor per donee during 2015, 2016 and 2017.  Unlike income tax returns, there is no “married filing jointly” status for gift tax reporting.  Each person files his/her own return if required.

Thus, in every one of the scenarios above, there is at least one reportable gift and a requirement for Mom to file a gift tax return.  Dad must also file a gift tax return in scenarios 1, 2, 5 and 6.

Note that scenarios 1 and 3 differ from scenarios 2 and 4 in terms of the property laws of the state in which Sam and Bitsy reside.  For example, if the younger couple later divorce, the different gifting methods might produce different outcomes in the division of their property. 

Reporting requirements vary greatly
These are the tax implications.

Scenario 1 – Mom has made a $50,000 gift to Sam; Dad has also.  Each of them can exclude $14,000 of the gift.  Thus, each of them must file a gift tax return to let the IRS know that each has used up $36,000 of the amount that they could otherwise have sheltered from the estate tax at death.  There is no actual gift tax due, unless either donor has made such large gifts during his/her lifetime that he/she has used up his/her entire lifetime exempt amount.

Scenario 2 – There are four different $25,000 gifts here (Mom to Sam, Mom to Bitsy, Dad to Sam, and Dad to Bitsy).  Mom and Dad have each gifted $50,000 and can each claim $28,000 of exclusion for the two donees.  Each must file a gift tax return reporting the use of $22,000 of the lifetime exempt amount.

Scenario 3 – There is only one gift here. Mom files a gift tax return reporting the use of $86,000 of her lifetime exempt amount.  Dad has no filing requirement.

Scenario 4 – There are two gifts here. Mom files a gift tax return reporting the use of $72,000 of her lifetime exempt amount. Again, Dad has no filing requirement.

Scenario 5 – This has the same numerical outcome as scenario 1, although the gift tax returns filed here look slightly different.  Dad’s election to split gifts produces community property-like treatment. Please note that if Dad elects to split these gifts by Mom this year, he must join her in reporting half of all gifts she made from her separate property during the year (even if she makes a gift to her worthless brother Elroy...). 

Scenario 6 – The same as above is true relative to scenario 2.

The recipients of the gifts have no gift tax or income tax reporting requirements. From the standpoint of potential future family law issues, each recipient might want to document the receipt of the gift and how the funds were used.

Note that gift tax returns are also used to report more complex transfers, such as gifts into trusts or sales of assets between family members. 

Weigh your options before giving
You can see that the different scenarios produce a considerable amount of variation in what gift tax returns are required and the amount of lifetime exemption used by each parent.  Before making a gift, you should review your options and give careful consideration to which produces the best results from your point of view.

February 10, 2017

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John Karls - Partner, Tax - Dallas TX | Armanino
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