In addition to estate and gift taxes, there is GST tax on certain transfers that skip a generation. You skip a generation by leaving assets to grandchildren rather than children if your children are still alive. Unfortunately, if that is done, an additional tax is levied against the beneficiaries. In 2017 the tax amount is 40% on $5.49 million. In 2018 it changed to a combined lifetime federal estate and gift tax exemption of $11.2 million per person. It is possible for money to be subject to both estate tax and GST tax. There is no portability for GST tax. Therefore, the gift must be made by each person, it cannot be stored.

Annual Gift Exclusion

The annual gift exclusion for 2018 is $16,000.00. That means you can give any person $16,000.00 and you do not have to report it on a gift tax return. If you are married, you and your spouse can give $32,000.00 a year and not report it.
You can put 5 times the annual exclusion into a 529 plan to super fund it.

Gift Tax Returns

If you want to give more than $16,000.00 to one person you need to file a gift tax return. Filing a gift tax return does not mean you have to pay gift tax. The purpose of the return is for the IRS to keep track of what you are gifting your children. Then when you die the IRS looks at the gift tax returns and the estate tax return to see the total amount given. The estate tax exemption is lifetime estate and gift tax amount. Many families use gifting as a way to discount their estates at death.

The gift tax return is form 709. Depending on the gift a valuation or an appraisal is necessary so the IRS knows the exact value of the gift at the time it was given. One disadvantage to lifetime gift is that the giftee inherits your basis. Basis is what you paid for the asset. If it is real property and you have owned for a long time your basis could be very low. If that property is gifted to your child during your lifetime your child inherits your basis. When the property is sold the child will owe the same capital gains that you would. However, if your child inherits property at your death the basis is stepped up. What that means is it is as if you purchased the property on the day you died. If your child sold the property shortly after your death the capital gains could be zero. That cost-benefit analysis should always be discussed when doing gifting planning.

This same issue applies when dealing with stock. One of the most common gifts is stock for closely held companies. Again if you are the founder your stock basis is likely zero. If you gift that stock to your child his or her basis is also zero. This does not become an issue until the company is sold or if you are lucky enough goes through an IPO. Then the gain can be very large.

If you have questions about GST tax, GST returns which DBL handles, or using gifting as part of the bigger picture, contact any of the estate planning partners at DBL.