Understanding Gift Tax Rules can help Tax-Efficient Giving

February 12, 2025

Many people give financial gifts to family members, friends, or charities, whether for milestone events, education, or estate planning purposes. While gifting is a generous act, certain gifts may trigger tax obligations. Understanding federal gift tax rules, annual exclusions and lifetime exemptions can help individuals structure their giving in the most tax-efficient manner.

What Is the Gift Tax?

The gift tax is a federal tax imposed on transfers of money or property made without receiving something of equal value in return. The person making the gift, not the recipient, is responsible for paying any applicable gift tax. However, most gifts fall within exemption limits, meaning few individuals owe taxes on their generosity.

How the Gift Tax Exclusion Works

As of 2025, individuals can give up to $19,000 per recipient per year without triggering gift tax reporting requirements. Married couples can combine their exclusions, allowing them to gift $38,000 per recipient tax-free.

For example, if a parent gives their child $19,000 in 2025, the gift is below the annual exclusion and does not need to be reported to the Internal Revenue Service (IRS). However, if the gift is $26,000, the excess $7,000 must be reported, though it may not necessarily result in tax owed.

Lifetime Gift Tax Exemption

In addition to the annual exclusion, individuals have a lifetime gift tax exemption, which allows them to give away a set amount over their lifetime without incurring taxes. In 2025, this exemption is $13.99 million per person (or $27.98 million for married couples).

If a gift exceeds the annual exclusion, the excess amount is deducted from the lifetime exemption. Only gifts that surpass this exemption trigger actual gift tax liability. Most people will never reach this limit, meaning they can give substantial amounts tax-free.

What Types of Gifts are Tax-Exempt?

Certain types of financial gifts are automatically exempt from gift tax rules, including:

Payments for Medical Expenses: Direct payments to medical providers for someone else’s healthcare are not considered taxable gifts.
Educational Tuition Payments: Direct tuition payments to a school or university (not including room and board) are exempt from gift tax.
Gifts to Spouses: Unlimited tax-free transfers can be made to a U.S. citizen spouse. Gifts to a non-citizen spouse have a lower annual exclusion limit ($190,000 in 2025).
Charitable Contributions: Donations to IRS-recognized charities are tax-deductible and do not count toward the gift tax exemption.

Reporting Large Gifts to the IRS

If a financial gift exceeds the annual exclusion, the giver must file IRS Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. Filing does not necessarily mean taxes are owed—it simply records the amount deducted from the lifetime exemption.

For example, if an individual gifts $30,000 to a child in 2025, the excess $11,000 is reported on Form 709. However, it is deducted from their $13.99 million lifetime exemption, leaving them with $13.979 million remaining. Taxes are only due if lifetime gifts surpass the exemption limit.

Tax Planning Strategies for Gifting

To maximize the benefits of financial gifts while minimizing tax exposure, consider these strategies:

Spread gifts over multiple years to take advantage of the annual exclusion each year.
Leverage direct tuition or medical payments to help loved ones without using up gift tax exclusions.
Utilize trusts for structured wealth transfers, such as irrevocable trusts for minor children or special needs beneficiaries.
Coordinate with an estate plan to gradually minimize estate tax liability by gifting assets.

The Role of an Estate Lawyer in Gifting Strategies

An estate planning attorney can help structure financial gifts to align with long-term wealth transfer goals while minimizing potential tax liabilities. Whether incorporating gifting into an estate plan or establishing trusts for heirs, professional guidance ensures compliance with IRS regulations.

Financial gifting allows individuals to share wealth, support loved ones and reduce potential estate taxes. By understanding gift tax rules and planning strategically, you can help structure tax-efficient giving that benefit both the giver and the recipient. If you would like to learn more about the gift tax, please visit our previous posts.

Reference: Kiplinger (Jan. 14th, 2025) “What is the Gift Tax Exclusion for 2024 and 2025?”

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Financial Blunders Grandparents Should Avoid with Grandchildren

February 5, 2025

Grandparents often find immense joy in supporting their grandchildren, whether by funding education, contributing to major milestones, or simply providing for day-to-day needs. While these gestures can create lasting memories, an article from the AARP explains that financial missteps can lead to unintended consequences. Grandparents can balance generosity with financial security by understanding potential pitfalls and adopting thoughtful strategies. There are some common financial blunders grandparents should avoid with grandchildren.

Overextending Finances and Other Common Financial Mistakes Grandparents Make

One of the most common errors grandparents make is giving more than they can afford. This often happens out of a desire to help with significant expenses, like college tuition or housing. While the intention is noble, overcommitting financially can jeopardize retirement savings and long-term stability. Grandparents must evaluate their financial capacity before making significant commitments. Consulting with a financial advisor can clarify how much they can comfortably give without endangering their financial health.

Co-Signing Loans

Co-signing a loan for a grandchild, whether for a car, education, or personal use, can have serious implications. If the grandchild is unable to make payments, the financial burden falls on the grandparent, potentially damaging their credit score or creating unexpected debt. It’s essential to understand the risks before co-signing any financial agreement. Alternatives, such as contributing smaller amounts directly toward the loan, can provide support without the same level of risk.

Giving Unequally Among Grandchildren

Favoritism, whether intentional or perceived, can strain family relationships. For instance, funding one grandchild’s college tuition while offering no support to others can lead to resentment or conflict. To avoid these issues, grandparents should strive for fairness, considering equitable ways to help all grandchildren. Transparency about financial decisions and the reasoning behind them can also reduce misunderstandings.

Ignoring Tax Implications

Generous gifts can sometimes lead to unintended tax consequences. In 2025, the IRS allows individuals to gift up to $19,000 annually per recipient without triggering gift tax reporting requirements. Exceeding this threshold may require filing a gift tax return or result in tax liabilities. Grandparents should understand these limits and plan their giving accordingly. Contributions to 529 college savings plans or medical expenses paid directly to providers are additional tax-efficient options.

Failing to Prioritize Estate Planning

Large gifts made without considering overall estate planning goals can disrupt long-term plans or unintentionally disinherit certain heirs. Without proper documentation, disputes can arise among family members. Grandparents should incorporate financial gifts into their broader estate plans. Working with an estate planning attorney ensures that gifts align with their goals and minimize potential conflicts.

To avoid financial missteps, grandparents can adopt these thoughtful strategies:

Set clear boundaries and determine how much you can give without compromising your financial security.
Plan equitable contributions to ensure fairness among grandchildren, while considering individual needs.
Focus on education by contributing to tax-advantaged accounts, like 529 plans.
Pay for specific expenses directly to avoid triggering gift tax complications.
Work with financial and legal professionals to develop a giving strategy that aligns with long-term goals.

The Importance of Communication

Open communication with family members is key to avoiding misunderstandings or conflicts. Discuss your intentions and limitations with both your children and grandchildren, ensuring that everyone understands your approach to financial support. These conversations can strengthen family bonds and provide clarity about your financial role.

Balancing Generosity with Stability

Supporting grandchildren financially can be one of the most fulfilling aspects of grandparenting. Grandparents can avoid financial blunders with grandchildren by implementing thoughtful strategies that can provide meaningful assistance, while safeguarding their financial future. A balanced approach ensures that your generosity strengthens family ties without creating financial or relational strain. If you would like to learn more about estate planning for older couples, please visit our previous posts.

Reference: AARP (Nov. 11, 2024) “The 5 Worst Mistakes Grandparents Can Make with Money”

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Estate Planning with Annuities can be Complex

July 15, 2024

Estate planning can seem daunting. If you’re new to it, you have to learn about power of attorneys, trusts and much more. However, this effort can pay off many times over for you and your loved ones. Once you have a handle on the basics, you can start incorporating advanced strategies into your estate planning such as annuities. Nerdwallet makes the case that having good estate planning is important, and annuities are a vital tool to consider. Estate planning with annuities can be complex.

Annuities are insurance contracts that offer a series of payments over time. These contracts can pay out for a set period or the rest of your life. People often use them to manage retirement income.

Annuities have two phases. An accumulation phase is where you contribute money to the fund, and a withdrawal phase is where the contract pays out. Leaving your money in an annuity during the accumulation phase gives it room to grow tax deferred.

Annuities offer income security, tax advantages and legacy planning opportunities. Not only can you fund your retirement, but you can ensure a steady income stream for your beneficiaries. Annuities are a flexible tool to hedge against volatile markets and achieve financial security.

One of the primary reasons to include annuities in your estate plan is to provide for your heirs. According to Charles Schwab, there are three strategies you can consider during the accumulation phase:

Cash out your annuity if you’re at the end of its surrender period, though be aware of potential charges and taxes. This option provides immediate liquidity, which can be useful for other estate planning needs. However, you may suffer fees or tax penalties related to the early withdrawal.

Moving ownership to a non-grantor irrevocable trust will remove your annuity from your estate to benefit your heirs. This strategy can protect the annuity’s value from creditors and reduce estate taxes.

Make periodic withdrawals during the accumulation phase to take advantage of favorable tax treatment. Regular withdrawals can help you manage your income and tax liabilities more effectively and provide funds for other investments or expenses. This approach allows you to access the annuity’s value without triggering large tax penalties.

Once your annuity enters the payment phase, you have different options to support your estate planning goals:

Annual Gifts to Heirs: Make annual gifts using annuity distributions. This will reduce your taxable estate, benefit your loved ones and comply with annual gift restrictions.
Purchase Life Insurance: Use payouts to fund life insurance premiums. By setting up one of these policies, you can provide a tax-free inheritance for your beneficiaries.
Charitable Donations: Donate annuity payments to reduce taxable income and support charitable causes.
Reinvestment: Reinvest annuity payments into other financial instruments to continue growing your estate’s value.

Estate planning with annuities can be complex. However, you don’t have to navigate it alone.

Key Takeaways

Income Security: Annuities provide a steady income stream, ensuring financial stability during retirement and for your beneficiaries.
Tax Advantages: Annuities allow contributions to grow tax-deferred, and strategic payouts minimize taxable income.
Legacy Planning: Transferring annuities to a trust or using them to purchase life insurance protects your estate from taxes and ensures that your heirs benefit.
Flexibility: Options like annual gifts, charitable donations and trust transfers offer diverse ways to include annuities in your estate plan.

Reference: Nerdwallet (Dec. 21, 2022) “Annuities: What They Are and How They Work – NerdWallet” and Charles Schwab (Nov. 17, 2023) “5 Ways to Use Annuities in Your Estate Plan”

If you would like to learn more about annuity planning, please visit our previous posts.

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Avoiding Tax Issues When Gifting to Grandchildren

July 2, 2024

Gifting to grandchildren is a wonderful way to share your wealth with young loved ones. Getting some help at the right time can help ensure that they enjoy a bright future. However, taxes may drastically reduce the inheritance they receive. That’s why avoiding tax issues is vital when gifting to grandchildren, so you are making the most of your legacy.

Gifting to grandchildren can be transformative for them and their future. These gifts can make a difference, whether for education, starting a business, or simple financial stability. However, making the greatest difference will require a keen understanding of estate taxes.

Before a deceased person’s estate transfers to their inheritors, the government levies estate taxes. However, many ways exist to reduce or even avoid estate taxes altogether. Estate tax law is largely progressive and provides many allowances and deductions. In particular, accounts are available to fund your beneficiaries’ educations tax-free.

According to ElderLawAnswers, 529 accounts are ideal for helping your inheritors afford education. These special savings accounts are designed for college education expenses, K-12 tuition, apprenticeship programs and student loan repayments, and they offer significant tax advantages. The money you put into a 529 account grows tax-free, and withdrawals for qualified education expenses are also tax-free.

However, the disadvantage of a 529 account is that it only covers education-related expenses. General-purpose gifting has significant limits if you want to avoid a large tax burden.

The IRS places annual limits on gifting to grandchildren, the annual gift tax exclusion. As of 2024, you can give up to $18,000 per year to each grandchild without incurring any gift taxes. If you stay within these limits, you won’t have to pay gift taxes or worry about reducing your lifetime gift and estate tax exemption.

Another strategy to reduce or avoid estate taxes is setting up a trust. You can structure trusts to manage your assets to meet specific goals. By implementing a trust, you can decide how and when your grandchildren receive their inheritance. This is particularly useful if they are young or not yet financially responsible.

There are various types of trusts to consider, such as:

Revocable Trusts: These allow you to maintain control over the assets and make changes as needed.
Irrevocable Trusts: These remove the assets from your estate, potentially reducing estate taxes. However, you cannot change the terms once it’s set up.
Education Trusts: Specifically designed to fund education expenses, similar to 529 accounts but with more flexibility.

Avoiding tax issues when gifting to your grandchildren will ease your tax burden and maximize your contributions to their future. If you would like to learn more about gifting, please visit our previous posts.

Reference: ElderLawAnswers (Jul. 12, 2018) “Using 529 Plans for a Grandchild’s Higher Education”

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Owning a Second Home creates Unique Tax Implications

June 13, 2024

Many people dream of owning a cabin or a sunny beach house away from their homes. While these dreams are beautiful, buying a second home isn’t as simple as picking a new getaway. Your second home can increase your tax burden more than your first. Owning a second home creates unique tax implications to keep in mind. According to Central Trust, understanding the strings attached to a second home is a must.

If you already own one home, purchasing a second means doubling up on property tax bills. Your deductions for state and local taxes are also capped at $10,000. State taxes on your primary home often reach that limit on their own. As a result, a second home may increase your tax liability much more than you’d expect. While you can deduct mortgage payments on your second home, it’s limited to a combined total of $750,000 for both residences.

There are tax benefits if you plan to rent and limit personal use to 14 days or 10% of rental days. Doing so allows you to deduct utilities, maintenance and improvement costs as you would for any other rental property. However, be careful – renting to relatives at market rate still counts as personal use.

When selling your primary residence, you can usually exclude a portion of the gains from taxes. However, this isn’t the case with a second home. Your vacation house is taxed as an investment property, which means capital gains can go up to 23.8%.

However, there’s a way to avoid paying capital gains tax on your second home. You may avoid capital gains tax if you live in it as your primary residence for at least two of the five years before you sell. Considering the average home price in America today, a lower tax rate can amount to impressive savings.

On the other hand, lost rental revenue or an increased cost of living could detract from these savings. Weigh the costs and benefits before choosing your tax management strategy.

Maintaining solid records is crucial if you’re renting out a second home. If the IRS audits your return and you can’t provide evidence, you could face extra taxes and penalties. Keep receipts, bills and documents detailing any expenses related to the property. If you plan to avoid capital gains tax by living in the home, keep proof of your residence and travel during the time in question.

The thrill of buying a second home should not overshadow the importance of thorough estate planning. Consult a tax professional or financial advisor to avoid costly mistakes.

Key Takeaways:

Double the Taxes: Owning a second home brings a second set of property tax and mortgage interest bills.
Rental Benefits: Renting out your vacation home could offer tax deductions.
Capital Gains Tax: Selling a second home could subject you to up to 23.8% capital gains tax. Living there for two of five years before selling can help avoid this.
Record Keeping is Essential: Proper documentation of expenses and rental income is crucial to avoid penalties in case of an IRS audit.
Consult an Advisor: Seek guidance from tax or estate planning professionals to create a sound plan and minimize tax implications.

Owning a second home creates unique tax implications that can cause a headache for your estate planning. Discuss the topics in this post with your estate planning attorney before you purchase that dream second home. If you would like to learn more about tax planning for real property, please visit our previous posts.

Reference: Centraltrust (March 2024) “Second Homes & Tax Implications – Central Trust Company”

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Key Estate Planning Strategies for Executives

May 23, 2024

Executives manage complex financial landscapes while striving for professional success, creating unique estate planning goals and challenges. Central Trust Company shared insights in the article “Estate Planning For Executives,” which focused on liquidity concerns, tax efficiency and beneficiaries for certain assets. This article explores key estate planning strategies for executive’s unique goals.

Executives often face liquidity challenges and may have a significant portion of their wealth tied up in company stock. Diversifying investments and implementing strategies to manage concentrated stock positions are critical to mitigate risk and enhance financial security.

Navigating tax-efficient giving strategies is essential for executives looking to give back to their communities or support charitable causes. Estate planning considerations, including lifetime gifts and the transfer of vested stock options, play a crucial role in preserving wealth and minimizing tax liabilities.

Transitioning from a successful career to retirement can be exciting and daunting for executives. Planning for retirement involves forecasting complex benefits, managing investment portfolios and ensuring a smooth transition from the accumulation phase to the distribution phase of their financial life.

Comprehensive estate planning for executives includes strategies that address their income tax bracket, estate tax rates and various types of investments. Strategies such as wills, trusts, powers of attorney (POAs) and advance directives are central to protecting an executive’s assets and support building wealth.

A knowledgeable and experienced estate planning attorney is central to a holistic plan that meets an executive’s goals, including:

Reducing taxes and taxable estate values.
Transferring stock options and other nuanced investments to heirs.
Preserving or building their wealth.

Key Estate Planning Strategies For Executives:

Address Unique Challenges: Consider liquidity, stock options, estate taxes and beneficiaries.
Maximize Tax-Efficiency: Explore tax-efficient strategies to preserve wealth.
Build a Comprehensive Plan: Include wills, trusts, and POAs to address diverse financial needs and goals.
Define Personal Objectives: Define personal philosophies and objectives to create a comprehensive plan that aligns with your vision for the future.

Given the complexities of their careers and wealth management needs, executives face unique financial and estate planning challenges. Addressing key concerns and defining personal objectives helps executives secure a financial future for themselves and their families. If you would like to learn more about estate planning for wealthy couples and families, please visit our previous posts.

Reference: Central Trust Company (July 19, 2023) “Estate Planning For Executives”

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Maximizing Tax-Free Giving to Children

May 21, 2024

In the ever-evolving landscape of wealth management, affluent estate owners choose to support their children and grandchildren financially during their lifetimes. While the desire to make a positive impact is evident, navigating the tax implications of such generosity can be complex. Fortunately, several strategies exist to facilitate tax-efficient giving, while maximizing the benefits for donors and recipients. Based on Kiplinger’s article, “Three Ways to Give to Your Kids Tax-Free While You’re Still Alive,” we explore three strategies that can maximize tax-free giving to children in your estate planning.

One estate planning strategy leverages possible tax breaks on capital gains. Beneficiaries of assets that increase in value have traditionally received a break if the IRS calculates capital gains tax based on the inherited value, not when the decedent purchased the asset. The inherited asset’s higher valuation is considered a “stepped-up cost basis” and lowers capital gains tax on any increase in value.

You can give to your children during your lifetime and get capital gains tax breaks if the recipient’s taxable income falls below certain thresholds. If a single child’s taxable income is below $47,025 or a married child’s is below $94,050, they may pay zero capital gains tax upon selling the asset. Note that these tax breaks apply to capital gains. Estate taxes are a different story.

The gift tax exclusion allows individuals and married couples to give money to a child and maximize tax efficiency. Individuals can contribute money to a child’s college education or the down payment on a home as a gift. In 2024, the exclusion amount is $18,000 per recipient or $36,000 for married couples engaging in split gifts. With the lifetime federal exclusion set at $13.61 million per person, most individuals can engage in tax-free giving without exceeding their lifetime allowance.

Specific expenditures, such as educational or medical expenses and direct payments to institutions, are excluded from the annual gift limit and lifetime exclusion. This direct payment strategy allows donors to support significant financial obligations, such as college tuition or medical bills, without impacting their gifting allowances. Donors can provide meaningful support to their children and grandchildren while minimizing tax implications.

While maximizing tax-free giving is essential, assessing the broader impact of financial support on recipients is essential. By incorporating gifts into a comprehensive financial plan, donors can align their generosity with their financial objectives and ensure sustainable support for future generations.

Key Tax-Free Giving to Children Takeaways:

Giving to a Child Tax-Free: Take advantage of tax breaks to give to a child in your lifetime.
Giving in Your Lifetime: Maximize the tax advantage of giving money to a child during your lifetime.
Paying for College: Transferring money directly to a child’s college does not impact the gift tax exclusion limit.

Maximizing tax-free giving allows affluent parents to support their children and grandchildren, while minimizing tax liabilities. Implement gifting strategies and consider the broader financial impact to leave a lasting legacy and support loved ones. If you would like to learn more about minimizing taxes in your estate planning, please visit our previous posts.

Reference: Kiplinger (April 10, 2024) “Three Ways to Give to Your Kids Tax-Free While You’re Still Alive,”

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Do You Pay Taxes on Wedding Gifts?

April 9, 2024

You are a father whose son is getting married. You want to provide a wonderful wedding gift that your son and his bride will cherish and enjoy. Do you pay taxes on wedding gifts? A generous gift for a child’s wedding doesn’t necessarily cause a tax problem unless your lifetime gifts are over the lifetime exclusion limit, which is extremely high right now. A recent article from Yahoo! Finance, “Do I Need to Worry About the Gift Tax If I Pay $60,000 Toward My Daughter’s Wedding?” says most Americans won’t have to worry about the gift tax.

In 2024, the lifetime exclusion is $13.61 million per person and $27.22 million for a married couple. Unless you’ve gone above and beyond these limits, you can make as many gifts as you like to anyone you choose without worrying or paying the 18% to 40% federal gift tax.

But there’s one thing to remember: if you make a gift over the annual gift limit, which is $18,000 per person in 2024 or $36,000 for a married couple, you need to send the IRS Form 709. The form should be submitted even if no gift taxes are due. It’s a simple and smart move.

How do gift taxes work? The federal gift tax doesn’t come into play often. Most gifts are tax-free simply because of the size of both the annual and lifetime gift exclusions. You can gift freely if you keep the limit in mind.

The lifetime exclusion for gift and estate taxes is so high right now that few Americans need to worry about it. If you are generously minded, you may gift $13.61 million (individual) and $27.22 million (married couple). The lifetime exclusion is just as it sounds: the number of gifts you may give during your life or as part of your federal estate.

If you are charitable-minded, you may make many contributions. There are no gift taxes levied on charitable donations, gifts to spouses or dependents, or gifts to political parties. As long as you pay directly to the institutions, there are no taxes on college tuition or healthcare expenses.

There are some strategies to manage the gift tax. One would be to split your $60,000 gift between your daughter and her fiancé. Both gifts would be under the 2024 $36,000 per person exclusion, assuming you are married, so there would not be a gift tax.

Another tactic is to spread the gift out over a few years. Let’s say you’re a single parent. You could gift your daughter and her fiancé $15,000 each this year and next, keeping you below the $18,000 annual gift tax exclusion.

If you’ve already given a gift of $60,000 to your daughter and made gifts over and above the $13.61 million lifetime exclusion, speak with your estate planning attorney to determine where you fall in the gift tax brackets and how much you’ll need to pay.

The easiest way to avoid gift taxes is to pay the vendors directly, but this depends on your overall situation. For instance, where is the money coming from—tax-deferred accounts or investment accounts? It would be wise to talk with your estate planning attorney before making a large gift. Do you pay taxes on wedding gifts? If you have a wedding coming up and are concerned about gift taxes, you can pay the vendors directly rather than giving money directly to the happy couple. If you would like to read more about the gift tax, please visit our previous posts.

Reference: Yahoo! Finance (March 14, 2024) “Do I Need to Worry About the Gift Tax If I Pay $60,000 Toward My Daughter’s Wedding?”

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The Estate of The Union Season 3|Episode 11

The Estate of The Union Season 3|Episode 3 is out now!

March 21, 2024

The Estate of The Union Season 3|Episode 3 is out now! Taxes come in all favors. Sales taxes, excise taxes, capital gains taxes, etc. We are all concerned about our income taxes as we approach April 15th. Many of us will believe we pay way too much, and nobody will feel like they should pay more! But there’s another tax to be concerned about: The Death Tax.

In this edition of The Estate of the Union, Brad Wiewel dissects the Death tax and it’s first cousin, the Gift Tax and explains them in a way that everyone can understand. He also sheds like on what is going to happen on January 1, 2026 – unless Congress changes the law; so, stand by!

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand. It is Estate Planning Made Simple! The Estate of The Union Season 3|Episode 3 is out now! The episode can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. If you would prefer to watch the video version, please visit our YouTube page. Please click on the links to listen to or watch the new installment of The Estate of The Union podcast. We hope you enjoy it.

Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

When Gift Tax Return Should Be Filed

March 20, 2024

Gift tax returns may be the most misunderstood and overlooked part of estate planning. The first mistake people make, according to the article “Know The Most Misunderstood Part Of Estate Plans: Gift Tax Returns” from Forbes, is not knowing when a gift tax return should be filed. Even if a gift you make is tax-free, you might have to file a return anyway. And there are times when you aren’t required to file a gift tax return, but it’s still a good idea to do so.

The gift tax return is IRS Form 709, which can be downloaded from the IRS website at no cost.

In most cases, the IRS can’t take action on an incorrect gift tax return once more than three years have passed since it was originally filed. There are exceptions for fraudulent returns or if a return is either missing information or substantially misstates information.

However, there’s no statute of limitations if you fail to file a gift tax return, and the IRS can raise questions about the transaction at any time. This includes coming after your heirs or your estate after you’ve passed. At that time, your heirs or executor may not have the evidence to prove you complied with the tax law. The IRS would be within its rights to assess not only the gift tax but also penalties and interest for all the years from the date of the gift tax filing to the current date.

For this reason alone, it’s a good idea to file a gift tax return if there’s even the slightest question of whether it’s necessary.

Form 709 has a section for reporting “non-gift transactions.” Some estate planning attorneys recommend taking advantage of this to start the statute of limitations clock ticking and prevent the IRS from recharacterizing your gift years later as a taxable gift.

Consider this especially when you sell assets to a trust or shift assets from one irrevocable trust to another, known as “decanting” a trust. Consider also filing a gift tax return for a non-gift if you take advantage of the generation-skipping transfer tax exemption through a trust.

Another common mistake is not realizing that certain actions are considered gifts by the IRS, whether in the general sense or not. Let’s say you sell an asset to your children at less than market value. The difference between the selling price and the market value is a gift. So is forgiving or making a loan at a below-market interest rate.

If parents pay bills for adult children, this might be considered a gift if the gifts are valuable or if you also make significant gifts of money or property to the same person in the same year.

A gift tax issue the IRS pays close attention to is valuation. There’s not much question about the value of a publicly traded security, but for many other assets, there’s a lot of room to question the correct value, and the gift tax is based on the asset value at the time the gift is made.

While spouses may make unlimited gifts to each other tax-free, there are times when gifts between spouses must be reported. One time is when the gift is defined in the tax code as a “terminable interest.” Another time is if one spouse is not a U.S. citizen. Gifts to that spouse from the other spouse exceeding a certain amount during the year must be reported on IRS Form 709.

It’s always a good idea to check with your estate planning attorney about when a gift tax return should be filed to protect yourself and your heirs. If you would like to read more about gifting and estate planning, please visit our previous posts.

Reference: Forbes (Feb. 16, 2024) “Know The Most Misunderstood Part Of Estate Plans: Gift Tax Returns”

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Category: Gift Tax

Understanding Gift Tax Rules can help Tax-Efficient Giving

Financial Blunders Grandparents Should Avoid with Grandchildren

Estate Planning with Annuities can be Complex

Avoiding Tax Issues When Gifting to Grandchildren

Owning a Second Home creates Unique Tax Implications

Key Estate Planning Strategies for Executives

Maximizing Tax-Free Giving to Children

Do You Pay Taxes on Wedding Gifts?

The Estate of The Union Season 3|Episode 3 is out now!

When Gift Tax Return Should Be Filed

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