Mythbusters – Gifting To Family Members

As we age, the adage “you can’t take it with you” begins to hit home.  Indeed, many of our estate planning clients consider inter vivos (during lifetime) gifts to family members as part of their estate planning.

Let’s bust three of the most common myths that exist about lifetime gifting.

Myth 1 – The recipient of the gift has to pay tax on the gift.

NO!  Although it is somewhat counterintuitive, it is the person making the gift who will bear the tax liability (if any).  The recipient of the gift enjoys the gift tax-free!

Myth 2 – If I make a gift over $15,000, I have to pay tax.

PROBABLY NOT!  Have you cumulatively gifted over $11.58 Million in your lifetime?  If not, you won’t have to pay tax on the gift that you make in excess of $15,000.  If you do make a gift in any one year to an individual in excess of $15,000, you will have to report the gift to the IRS via a gift tax return.  The IRS, in turn, will make note of the resulting reduction to your lifetime tax-free gift exclusion (limit), which in 2021 remains $11.58 Million.  However, you will not have to pay tax on the gift if you have not cumulatively exceeded $11.58 Million in lifetime gifts.  Do bear in mind that a gift in excess of $15,000 may reduce your available estate tax exemption when you die.  If you’re thinking about making a gift over $15,000, it likely warrants a call or e-mail to your planning attorney.

Myth 3 – I want to make a contribution to my grandchild’s 529 but I’m limited to $15,000 because I don’t want to report the gift and reduce my lifetime exclusion.

NO!  There is a special rule for 529 accounts that permits a grandparent to gift an upfront amount over $15,000 but elect to treat the gift as spread over 5 years.  This means that a very generous grandparent can gift $75,000 to a grandchild’s 529.  The beneficiary of the 529 will get the benefit of the tax-free growth of this huge upfront contribution.  And the generous grandparent will be treated as having made five $15,000 annual gifts in each of the next 5 years.  And because the amount of the gift is $15,000, it is under the reporting requirement!

Gift tax rules are subject to frequent change and we will report any changes in this blog.  If you have any questions or would like to discuss your estate planning, please contact Jeremy Rachlin at jrachlin@bulmandunie.com or Jared Sands at jsands@bulmandunie.com.