Taxpayers can transfer substantial amounts free of gift taxes to
their children or other donees each year through the proper use of this annual
exclusion, which is $15,000 for 2018.
The exclusion covers gifts an individual makes to each donee
each year. Thus, a taxpayer with three children can transfer a total of $45,000
to his or her children every year free of federal gift taxes. If the only gifts
made during a year are excluded in this fashion, there is no need to file a
federal gift tax return. If annual gifts exceed $15,000, the exclusion covers
the first $15,000 and only the excess is taxable. Further, even taxable gifts
may result in no gift tax liability thanks to the unified credit (discussed
below). (Note, this discussion is not relevant to gifts made by a donor to his
or her spouse because these gifts are gift tax-free under separate marital
deduction rules.)
Gift-splitting by married taxpayers: If the donor of the gift is married, gifts to
donees made during a year can be treated as split between the spouses, even if
the cash or gift property is actually given to a donee by only one of them. By
gift-splitting, therefore, up to $30,000 a year can be transferred to each
donee by a married couple because their two annual exclusions are available.
Thus, for example, a married couple with three married children can transfer a
total of $180,000 each year to their children and the children's spouses ($30,000
for each of six donees).
Where gift-splitting is involved, both spouses must consent to
it. Consent should be indicated on the gift tax return (or returns) the spouses
file. IRS prefers that both spouses indicate their consent on each return
filed. (Because more than $15,000 is being transferred by a spouse, a gift tax
return (or returns) will have to be filed, even if the $30,000 exclusion covers
total gifts.)
The "present interest" requirement: For a gift to qualify for the annual exclusion, it
must be a gift of a "present interest." That is, the donee's
enjoyment of the gift can't be postponed into the future. For example, if you
put cash into a trust and provide that donee A is to receive the income from it
while A is alive and donee B is to receive the principal at A's death, B's
interest is a "future interest." Special valuation tables are
consulted to determine the value of the separate interests you set up for each
donee. The gift of the income interest qualifies for the annual exclusion
because enjoyment of it is not deferred, so the first $15,000 of its total
value will not be taxed. However, the gift of the other interest (called a
"remainder" interest) is a taxable gift in its entirety.
Exception to present interest rule: If the donee of a gift is a minor and the terms of
the trust provide that the income and property may be spent by or for the minor
before he or she reaches age 21, and that any amount left is to go to the minor
at age 21, then the annual exclusion is available (that is, the present
interest rule will not apply). These arrangements allow parents to set assets
aside for future distribution to their children while taking advantage of the
annual exclusion in the year the trust is set up.
"Unified" credit for taxable gifts: Even gifts that are not covered by the exclusion,
and that are thus taxable, may not result in a tax liability. This is so
because a tax credit wipes out the federal gift tax liability on the first
taxable gifts that you make in your lifetime, up to $11,180,000 (for 2018).
However, to the extent you use this credit against a gift tax liability, it
reduces (or eliminates) the credit available for use against the federal estate
tax at your death.
