Gift Tax Returns for Annual Exclusion Gifts

Wednesday, February 19, 2014

Clients often ask whether it is necessary to file a federal gift tax return for gifts that are within the annual exclusion. Typically, gifts made to an individual (other than one’s spouse) which total less than the federal gift tax annual exclusion amount ($14,000 for 2013 and 2014) will not require a gift tax return filing. Obviously, there are exceptions and special cases that will require a gift tax return to be filed even for gifts of lesser amounts. These include gifts to certain trusts and gifts of unusual assets that are difficult to value. In addition, filing a return may be wise with respect to a gift that is part of a complicated gifting plan in order to limit the time the IRS may review and possibly challenge the value of the gift.

One confusing point that arises often is how these rules apply to married couples who make gifts to others. A married couple may make unrestricted transfers to each other of an unlimited amount without any reporting if the recipient spouse is a US citizen. If the recipient is not a US citizen the exclusion amount is limited and such gifts should be discussed with us. If a couple wishes to make annual exclusion gifts to others that will take advantage of both spouses’ annual exclusions, a gift tax return may be required depending upon how the transfer is made. If each of the spouses makes a gift to the recipient from his or her own separate assets in an amount equal to or less than the annual exclusion, no gift tax return is due. This would include a gift made from a spousal joint account, since this is treated as having been made half by each spouse. If the couple makes a gift from the assets of one of the spouses only, which is in excess of that spouse’s annual exclusion but less than the total of the spouses’ combined annual exclusions, a gift tax return is needed. These combined gifts require a gift tax return that will “gift split” and thus allow the donor spouse to use the annual exclusion of the other spouse. In effect, the gift becomes a gift one half from each spouse, but only if a gift tax return that signifies this is filed. If a couple “gift splits”, then all gifts made by either of them during the year in question are treated as if they were made half by each. Therefore, if there is a large gift to be made, that question should be very carefully examined to make sure the proper steps are taken to preserve the desired tax consequences. If a couple seeks to make the maximum annual exclusion gifts from only one spouse’s assets, but wishes to avoid filing a gift tax return, a very typical pattern might be for the spouse with the assets to first transfer the appropriate portion of the assets to the other spouse. Then each spouse can make a separate gift to the recipient. There can be no binding agreement to require the subsequent gift, for the IRS would collapse these steps. However, if the spouses collaboratively conclude that they want to make a gift to a recipient, and willingly each undertake these steps to transfer the assets freely, without obligation to each other, that process will avoid the requirement of filing a gift tax return.