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Estate Tax Consequences of Making Large Gifts

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This article is not meant to be legal advice.  It is a discussion relating to the possible tax consequences of giving large amounts of money.  If you need advice relating to tax issues please seek out an experienced attorney or CPA.

 

 

The following are a few options that people have when they want to give large amounts of money to someone.  This list is not meant to be all inclusive as other options exist.  The terms Donor and Donee will be used to describe the options.  The donor is the person giving the gift and the donee is the person receiving the gift.  Each option has its pros and cons and should be weighed carefully as the tax code and tax regulations are complicated and an experienced professional should be consulted if you have any questions as to how a transaction could affect you. 

 

Some important numbers to keep in mind:

 

Annual Exclusion Amount:  $12,000 per person for 2008.  This means that if spouses wish to give money to a person they can ?split? the gift and together give $24,000 per person per year.  Additionally spouses can give money to a husband and wife and ?split? each gift, thereby giving each of the donees $24,000 per year for a total gift to the donee spouses of $48,000 per year.

 

Lifetime Gift Amount:  $1 Million for each spouse

 

Estate Exemption Amount: 

2008 Federal Estate Exemption Amount:  $2 Million for each spouse; this is scheduled to go up to $3.5 Million for each spouse in 2009

 

2008 Minnesota Estate Exemption Amount:  $1 Million for each spouse; this is scheduled to stay at $1 Million for 2009

 

Direct gift from donor to donee:

 

Situation:  In 2008 the donor wishes to give to the donee all of the money in one lump sum.

 

Analysis:  If the donor gives the donee all of the money in one lump sum there will be no tax paid by either the donor or donee when the gift is made.  Since the donee is receiving a gift it is not considered income and won?t be taxed at that time.  However the donor will have to adjust their lifetime gift amount by any amount given that is over the annual exclusion amount.  Lets say $150,000 was given by the donor to the donee in 2008.  The donor would have to file a gift tax return stating that they used some of their lifetime gift amount.  The math works out as follows. 

 

$150,000 (the amount of the gift) - $12,000 (the annual exclusion amount) = $138,000.  Therefore the donor must reduce their lifetime gift amount by $138,000.  Leaving them with $862,000 remaining for their lifetime gift amount.

 

Additionally the donor will also be using some of their Estate Exemption Amount.  As noted above the 2008 Federal Estate Exemption Amount is $2 million.  The math for this is as follows:

 

$150,000 (the amount of the gift) - $12,000 (the annual exclusion amount) = $138,000.  Therefore the donor must reduce their Estate Exclusion Amount by $138,000.  Leaving them with $1,862,000 remaining for the Federal Estate Exclusion Amount.  This will impact the donor?s Estate Plan in that when the donor dies he will have less than the full Federal Estate Exemption to pass on to his or her survivors.  The same thing applies to the donor?s state estate exemption amount.

 

On a more positive note generally giving now is better than giving later.  A general rule when someone has excess capacity (meaning they will have more than enough to live on until death) is to use your lifetime exclusion amount as soon as possible.  Why?  Because it?s not just the $150K they gave away, but also all the future growth of the $150k they gave away.  It is now growing in the kids accounts and not the donor?s adding to their estate.  But it is important to keep in mind the age of the donees.  Only the donor will know if their children or whomever they give the money to are capable of handling large amounts of money.  Many 18 or even 25 year olds are not mature enough to properly handle large lump sum gifts.  The donor should discuss this whomever is advising them to see if a lump sum gift is the appropriate action.

 

Small gifts from donor to donee followed by a large gift if any money is left over.

 

Situation:  The donor wishes to give to the donee the money over a period of years.

 

Analysis:  If donor is worried about their lifetime exclusion (e.g., they expect to give more money near the end of their lives), one possibility would be to break up the payments over a few years, or even two years.  That would give them the option of exempting even more money.

 

To illustrate lets again assume that the donor wishes to give to the donee the sum of $150,000 eventually.  The donor could make gifts of $12,000 each year to the donee without any tax consequences.  But to give the full $150,000 by way of the $12,000 yearly gifts, that would take 13 years.  Keep in mind that the more yearly gifts that are made the less of an impact the final large gift will have on the lifetime exclusion amount and their Federal and State Estate Exclusion Amounts.  It is also important to remember that spouses can give a combined $24,000 per year to each person.  Furthermore, assuming that the donor?s are married and the donee are married, a Mom and Dad could give a combined $48,000 to their married child and their child?s spouse.

 

To further illustrate say Adam and Betty are the married parents and they have a child, Charlie whom is married to Daisy.  Adam and Betty could give $12,000 each to Charlie and $12,000 each to Daisy for each year!  So each receives $24,000 per year.  A total of $48,000 received by Charlie and Daisy.  When taking this approach Adam and Betty could give the $150,000 to Charlie and Daisy in a period of just 4 years.

 

 

No gift by donor to donee but a disclaimer of the assets the donor was to inherit.

 

Situation:  The money or assets that the donor wishes to pass to the donee in one lump sum are properly titled so that the donee is a the secondary beneficiary to the donor.

 

Analysis:  If the donor has yet to inheret the money, another option to consider is whether the donor could disclaim the assets. Disclaiming assets means that you don?t want them and release all rights to the assets.  The assets would then pass to whomever is next in line to receive the assets under any beneficiary designations that may be in place.  This could make sense if the gift is set up to pass to donor?s children as successor beneficiaries. 

 

Once again I would like to reiterate that these are only a few possibilities for passing on money.  Each situation is unique and all of the pros and cons of each method should be weighed with the potential donor.  If you have additional questions please contact an attorney or CPA to help you with these matters.  I am always happy to discuss estate tax issues.  I can be reached by phone at (952) 356-6470 or via email at james@jtandersonlaw.com.

 

IRS Circular 230 Notice:
 
Any tax advice contained in this written or electronic communication (including attachments) was not intended or written to be used to avoid any penalty imposed by a taxing authority, nor may the user/recipient of this communication use this written tax advice for that purpose. Please contact us with any questions regarding this notice at james@jtandersonlaw.com.

 

 

Full post as published by Minnesota Estate Planning Blog on April 29, 2008 (boomark / email).