There are a number of reasons to make lifetime gifts: to express affection, to provide financial assistance, or to support a charitable organization, to name a few. In some cases, you may even receive a tax benefit from making the gift, although most donors are motivated to make gifts for other reasons. As the end of the year draws near, people often think about making gifts, and, regardless of your motivations, it makes sense to consider how such gifts can affect your taxes.
The simplest form of gift, whether to a person or a charity, is an outright gift with no strings attached. The donor retains no legal ability to control the gifted property. When giving gifts to a younger person, you can transfer property to an account under the Uniform Transfers to Minors Act, which allows some control at least until the donee is 21. Other gifts provide more continued control, such as a gift to a trust for the donee’s benefit. Such trusts are usually irrevocable, and they often provide tax benefits to the donor.
Remember that if you want your gift to count for 2016, there are certain deadlines to meet. If your gift is to a person, your check must clear by year-end. If your gift is to a charity, the check must be written by year-end.
Many gifts are non-taxable, yet others may require payment of a gift tax. Gifts to a spouse or to charity, for example, are generally non-taxable. But be careful if the gift is to a trust for the benefit of a spouse or charity, as there are special rules as to whether such a gift will qualify for the marital or charitable deductions. There are also issues and special rules if your spouse is not a citizen.
Paying tuition directly to a college or paying medical expenses directly to a provider may also be a non-taxable gift. There is no limit to the amount and no requirement that the donee of the gift be related to you. For gifts not to an educational or medical institution, gifts of $14,000 or less in value are non-taxable. This amount is known as the annual exclusion and can be given to an unlimited number of people in any given calendar year. The amount is indexed to inflation and may go up on an annual basis.
The annual exclusion applies to “present interest” gifts, which are immediately available to the donee. Gifts to trusts are gifts of a “future interest” and may not qualify for the annual exclusion unless certain provisions are in the trust or rights are given to the beneficiary to allow the annual exclusion to apply.
In addition to the annual exclusion amount, each citizen or permanent resident has the ability over his or her lifetime to give up to $5,450,000 (increasing to $5,490,000 in 2017) on a cumulative basis. This is known as the Applicable Exclusion Amount and applies during lifetime or at death. If your combined lifetime gifts (in excess of the annual exclusion gifts) and the value of your estate at death is under this Exclusion Amount, no federal gift or estate tax will ever need to be paid. The Exclusion Amount is also indexed to inflation and is likely to increase each year.
Spouses can split gifts so that they can make annual exclusion gifts up to $28,000 per person, and they can make lifetime gifts in addition to annual exclusion gifts up to $10,900,000 for 2016.
Notably, Massachusetts has no gift tax. Making large lifetime gifts to your children (or to trusts for the benefit of your children), grandchildren, and others can be done to reduce the amount of Massachusetts Estate Tax that may have to be paid later out of your estate.
It should also be noted that any gift of any size can affect a person’s eligibility for Medicaid. Gifting must be done very carefully if future qualification may be needed.
Keep in mind that when a gift is made, the donee takes your tax basis in the property. On the other hand, if a beneficiary inherits property from an estate, the property receives a “step up” in basis, which effectively eliminates any unrealized capital gains on the property. Both income tax and estate tax results need to be taken into consideration when large gifts of other than cash are made, so be sure to consult your tax advisor.
Year-end can be a great time to consider making gifts. Please contact us if we can help you through this process.