Gifts and the Gift Tax

If you’ve read my previous blog post, you know that in 2013 an individual may give away $14,000 each year to another person for a college savings plan without triggering gift taxes, and a couple can give away $28,000.

That type of giving is controlled mainly by two important pieces of law from Title 26 of the United States Code: Chapter 1 §529 that deals with tax treatment for gifts to qualified college savings plans, and Chapter 12 that deals with gift taxes. Whether gift tax is triggered by a transfer depends on the amount given in a calendar year, and the amount of exclusion an individual may apply toward the transfer(s), said exclusion amount determined by Chapter 12 and the increases adjusting for inflation. Once again, for 2013 the amount is $14,000.

But, of course, what we didn’t discuss in that previous post was the fact that an individual may give a gift of $14,000, in cash or in kind, to most anyone in a calendar year, for most any purpose, without triggering gift taxes. Of course, if you intend to do planning such as this, contact a lawyer before wading into the deep end on your own: there are a (very) few conditions and rules that go along with these transfers. Not to mention that the exclusion amount includes all gifts given to that individual in that calendar year, from the gift card for birthday to the bicycle for Christmas.

(You might ask yourself, what’s the advantage/need of the §529 college savings plan, if the IRS let’s you give away the money already. The §529 plan allows the growth on the gift to go tax free, or allows you to lock in certain tuition prices, etc. above and beyond just giving the assets to the college attendee.)

So, back to the gift exclusion and gift tax: this law allows individuals to move assets out of their ownership and into the hands of others to avoid estate taxes at death. For example, if Grandpa has a a dozen shares of Berkshire Hathaway A common stock laying around, or a savings account with $1 million, or a massive home in Highland Park, and wants to move it out of his estate before he passes, he can give up to $14,000 apiece, each year, to the kids and grand-kids, even as a fractional ownership, to reduce the size of his estate and avoid estate taxes.

Another great use of the $14,000 gift tax exclusion is to transfer fractional ownership of property to one of the children who act as caretakers as grandpa gets older and needs help around the house, to compensate for that assistance in time of need, but not give away control of the asset quite yet.

Of course, there are other tools you can use to gift property, transfer property or move fractional ownership, such as insurance, trusts, etc., and some of the items I listed may trigger other tax provisions that need to be addressed. So you need to contact a lawyer to help you through the planning process, and make these decisions now, when you have the time to consider them.