Everyone Wants it Now! – A Summary of the 2015 Annual Gift Tax Exclusion & Other Non-Taxable Gifts

Posting by Billy Thomas

The Federal gift tax return (Form 709) is a function of the overall Federal transfer tax system. Excluding any discussion on the Generation-Skipping Transfer tax for now, the rules just to report gifts on a gift tax return are very complex. All gifts are not reportable on a Federal gift tax return, however it is important to understand what the IRS considers a gift:

A gift is the transfer of a beneficial interest in certain property in exchange for something less than full and adequate consideration. Common examples would include cash gifts for life events (i.e. – weddings, graduations), funding trusts with beneficiaries other than yourself, creating below-market loans, and countless other scenarios. The IRS does not even need to prove donative intent when considering a transaction a gift.

Gifts are typically classified as either a gift of a “present interest” or a gift of a “future interest.” On the surface these terms are self-explanatory. Present interest meaning the donee has a right to use the property now and future interest meaning the donee has a right to the property later. A gift of a present interest made to one person is eligible for an annual exclusion, which is currently at $14,000 in 2015. The annual exclusion amounts, which are adjusted for inflation every few years, provide extra incentive for a taxpayer to qualify gifts as a present interest. The present interest is often easier to identify especially when gifts are made of cash or securities directly to the donee without involving a trust.

Conversely, gifts of a future interest do not qualify for this annual exclusion. As mentioned above, a gift of a future interest can be described as any gift that the donee will not have immediate use and benefit of the property until a time certain in the future. An example of this would be a transfer to a trust with specific provisions on when a beneficiary can receive income or principal at a particular age. However, not all gifts to trusts are gifts of a future interest and some can even have a Crummey provision, which would allow the beneficiary the option of an immediate use of the gift thereby qualifying the gift as a gift of a present interest.

Whether a gift is of a present interest or future interest can be irrelevant when certain gifts are not reportable under the IRS rules. The most common example of this is a gift to a spouse. Spouses who are both US citizens enjoy can transfer money between each other without limits or reporting in most cases. Gifts to a noncitizen spouse are not eligible for this unlimited marital deduction, as well as more complex spousal gifts where certain rights are retained by the donor (typically in trust). Additionally, gifts made on behalf of a person to a qualified education institution or directly to a medical care facility are not reportable gifts.

There are many nuances to the gift tax rules and can easily be overlooked. Whenever you are considering making large gifts, it is best practice to consult with your estate planning, legal and/or tax advisors to assist you in executing your gift for the enjoyment of the donee, as well as yourself.

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