Giving gifts to our children is second nature. When parents and grandparents are able, helping out with major purchases and expenses in life can be a great way to help those we love get started in the world. From buying that first car to helping make a down payment on a new house, gifts can quickly exceed the annual exclusion and come into potentially taxable territory.
What’s Not a Gift
First, there are a few major things family often pays for that is not considered a gift and thus not subject to these rules. Tuition and medical expenses, paid directly to the provider, are not considered gifts. Smaller gifts that, taken together, do not exceed the yearly gift tax exclusion amount, which in 2020 is $15,000 are also exempt. Also, remember that your spouse can gift the same person $15,000 without creating tax consequences for the recipient. And you can do this to each child, grandchild, and other individuals. So if you’re trying to help your married child make a down payment on a house, you and your spouse could gift your child and their spouse $60,000 if done properly.
Making a Gift Beyond the Gift Tax Exclusion
If you want to make a more substantial gift, then you’re in excess of the annual gift tax exclusion. One thing to note, though, is that there is some year-to-year flexibility. So if you want to make a $20,000 gift one year, you will simply lower the amount you can gift the subsequent year, although this takes careful accounting and proper filing of forms with the IRS.
Another way to make a larger lifetime gift is to make the gift out of your future estate and adjust your estate accordingly. Again, the amount of your estate that is excluded from taxes varies from year to year, but in 2020, estates under $11.58 million for individuals are not subject to federal estate taxes. So you could, for example, give a child $1 million to purchase a business and adjust your estate accordingly to reflect that they have already received $1 million of the estate tax exemption. Again, this requires careful documentation both with the IRS and in your estate plan.
Implementing major lifetime gifts is possible, but takes careful planning to ensure there are no unexpected and significant tax consequences of the transaction. Depending on your goals, there may be multiple ways of achieving the results. Reach out to the team of experienced estate attorneys at Dunn Law Firm by calling (435) 628-5405 to set up a free consultation today.