WHAT IS A GIFT?
A gift is an irrevocable transfer of an asset without consideration from one person to another. A gift may be of tangible assets such as real estate, jewelry and physical objects or of intangible assets such as shares of stock, investment accounts or even insurance policies. Of course cash is great.
WHAT DO YOU MEAN BY IRREVOCABLE?
Irrevocable means that the gift is complete and you will not get it back. That sounds simple, but there have been many parents that thought that what they gave could still be theirs when they wanted it back. It is important to understand that it is no longer yours and if your child chooses to misspend your gift there is very little you can do except never give again. It is a serious decision which should be carefully thought out with full knowledge and understanding that you will never have access to that property again.
HOW MUCH CAN I GIVE?
The law allows each individual to give up to $14,000 per person each calendar year. This means that if you had ten grandchildren you could give $140,000 total made in separate equal gifts to each grandchild per year. If you are married, you and your spouse could double the amount to $280,000 per year.
IS THAT ALL I CAN GIVE?
Many people think that is all they can do. Actually a person can give up to $5,250,000 above the annual exclusion gifts during his lifetime before a tax would be due. This means that if dad gave you the farm worth $4,000,000, your dad would not owe any gift tax at that time.
DO I NEED TO FILE A FEDERAL GIFT TAX RETURN?
A gift tax return needs to be filed if you give over the annual amount in any one year. The amount given would be disclosed and applied against your $5,250,000 lifetime exclusion. Once you have given in excess of that amount, you would owe federal gift tax which is equal to the federal estate tax.
WHY WOULD A PERSON GIVE SUCH A LARGE GIFT?
If a person has a property that is rapidly increasing in value and it is important that it stay in the family, the gift procedure can be very beneficial. If you gave a piece of real estate which is next to the city limits and it will be worth substantially more in the future, the increase in value will not be in your estate. This is a freezing technique that can pass appreciating property from one generation to the next and avoid estate tax on the appreciated value. If you give land or an asset that you purchased for a low value you must be very aware of the potential capital gain tax that could affect your child’s tax when he sells many years later. Gifting can prepare a person for Medicaid qualification but it must be carefully planned and have at least a five year window after the transfer before applying for Medicaid.
There are many valuable uses for gifting in estate planning and it is important to review your assets and determine if any gifting would be beneficial for you and your family. For the average person in their later years a gift to a grandchild can be a rewarding event for both the grandparent and the grandchild. Most grandchildren still have that stock or money that grandmother gave them twenty years ago. It will always have that special meaning.