While large gifts are subject to gift taxation, since 2013 you may give away as much as $14,000, per recipient, per year, free of gift tax. This amount is inflation-indexed, previously $10,000 before 2002. These gifts also do not reduce the amount that you can pass free of gift tax—$1 million lifetime exclusion or $2 million if gifts are “split” with a spouse.
There is a great deal of flexibility in the types of property that can be transferred. Gifts that qualify for the $14,000 annual exclusion can be made in money, property such as stocks or bonds, or even a life insurance policy, as long as the recipient receives the right to possess or use the property. The gift may be in a trust if the terms of the trust give the recipient the immediate right to the property or income from the property. If the recipient is a minor, the gift may be made to a custodian or legally appointed guardian of the minor’s property. However, if the recipient is a child under 18, income from the property may be taxed at the parent’s marginal rate. This also applies if the tax year begins after May 25, 2007, and if the child is under 19 years of age or if the child is under 24 years of age and is a full-time student whose earned income does not exceed half of his or her own support.
You may give up to $28,000, per recipient, per year if you are married and your spouse consents to “split” your gifts. This is useful for spouses who do not own an equal amount of property. The spouse with less property can consent to gifts made by the wealthier spouse, thereby effectively doubling the amount that the wealthier spouse can give away free of gift tax.
If you have several children, you may distribute $28,000 to each child tax free without adding to the lifetime exclusion. To take advantage of “gift splitting,” both spouses must be U.S. citizens or residents. The consent must be given on a gift tax return, so a return must be filed even if no gift tax is due. A short form gift tax return is available for these returns.
One important thing to remember when making a gift is that the recipient must take your basis in the property. This means that if the recipient sells the property, any gain on the sale will be measured using the amount paid for the property, not what the property was worth when he or she received it. In contrast, if property is transferred to another through your estate, the recipient can use the value of the property at that time in measuring any gain on the sale of the property. Consequently, choosing the right property to achieve your goals is an important aspect of any gifting and taxes strategy.