Gift Splitting

Assume the federal gift tax annual exclusion for the current year is 19,000 dollars per donee. Renata Ferreira gives her nephew securities worth 30,000 dollars during the year and makes no other gifts to him. Which statement is correct?

1. A.The entire 30,000 dollars is excluded, because the annual exclusion applies per donor rather than per donee.Wrong. The exclusion is per donee per year. Renata could shelter 19,000 dollars for EACH separate recipient, not 19,000 dollars total per recipient plus the rest.
2. B.The nephew owes federal income tax on the 30,000 dollars in the year he receives it.Wrong. Gifts are not income to the recipient. Any gift tax obligation belongs to the donor.
3. C.Renata may not make the gift, because transfers exceeding the annual exclusion are not permitted.Wrong. There is no limit on the size of a gift. Exceeding the exclusion triggers a filing obligation, not a prohibition.
4. D.The first 19,000 dollars is excluded and the remaining 11,000 dollars is a reportable taxable gift, normally absorbed by Renata's lifetime exclusion so that no tax is actually paid.Correct. The excess over the annual exclusion is reported on a gift tax return and applied against the lifetime exclusion.

Why: The annual exclusion shelters gifts up to the stated amount PER DONEE PER YEAR, so the first 19,000 dollars of this gift is excluded entirely. The remaining 11,000 dollars is a taxable gift, which Renata reports on a federal gift tax return. Reporting it does not necessarily mean paying tax: the excess is normally applied against her lifetime exclusion, and gift tax is actually due only once that lifetime amount is exhausted. The recipient never owes income tax on a gift, and the nephew takes Renata's carryover basis in the securities rather than a stepped-up basis.

A grandparent wants to fund a newborn's future college costs with one large gift while keeping control of the account. Comparing a 529 plan with a Coverdell education savings account, the 529 plan:

1. A.Has a lower annual contribution limit but a wider range of qualified expensesThe low contribution limit belongs to the Coverdell, not the 529.
2. B.Requires the donor's income to be below a stated limit, as the Coverdell doesCoverdell contributions phase out at higher incomes. The 529 has no donor income limit, which is a major reason grandparents use it.
3. C.Transfers control of the assets to the beneficiary at the age of majorityThat is a Coverdell and UTMA feature. A 529 account owner keeps control indefinitely.
4. D.Accepts far larger contributions and lets the donor elect to spread a single large gift over five years for gift tax purposes, while the account owner retains controlCorrect. Large contributions, five-year gift tax averaging, and continued donor control are exactly what this grandparent wants.

Why: A 529 accepts far larger contributions and lets a donor elect to treat a single large gift as if made ratably over five years for gift tax purposes, which lets a big lump sum fit within annual exclusions. The account owner - here the grandparent - keeps control and may change the beneficiary. A Coverdell has a small annual contribution limit, phases out at higher donor incomes, and generally passes control to the beneficiary at the age of majority.

Harold and Nadia Feinstein want to move money to their three children and two grandchildren this year. All the property is titled in Harold name alone. They plan to give $40,000 to each of the five, and they will elect gift splitting. Assume an annual exclusion of $18,000 per donee for the year in question. What is the gift tax consequence?

1. A.No taxable gifts, because five donees at $36,000 each shelters the entire transferFive donees at $36,000 shelters $180,000, but they gave $200,000. The last $20,000 exceeds the exclusions.
2. B.$200,000 of taxable gifts, because gift splitting is available only for gifts to the couple own childrenGift splitting has no relationship requirement. It applies to gifts to grandchildren, friends or anyone else.
3. C.$20,000 of taxable gifts, reported on a gift tax return and charged against their lifetime exclusion, with no tax actually dueCorrect. Ten exclusions of $18,000 shelter $180,000; the $20,000 excess is a reportable taxable gift that reduces the lifetime exclusion.
4. D.$110,000 of taxable gifts, since only one annual exclusion per donee is availableThis ignores the gift-splitting election, which is stated in the facts and doubles the exclusion per donee to $36,000.

Why: Gift splitting lets a married couple treat gifts made by one spouse as made one half by each, so each donee can receive two annual exclusions, or $36,000. Five donees at $36,000 shelters $180,000 of the $200,000 given. The remaining $20,000 - $4,000 per donee - is a taxable gift that reduces their lifetime exclusion amounts. No gift tax is actually paid unless the lifetime exclusion is exhausted, but a Form 709 gift tax return is required, both to report the taxable gifts and because gift splitting itself requires the consenting spouse signature.

A grandfather gifts a remainder interest in a trust (the beneficiary receives it only at the grandfather's death) to his grandson this year. Regarding the gift tax ANNUAL EXCLUSION, this gift:

1. A.Qualifies like any gift under the annual limitWrong-but-tempting. The DOLLAR limit is the second test - PRESENT INTEREST is the first, and this fails it.
2. B.Is exempt because family trusts avoid gift taxWrong. No family-trust exemption exists.
3. C.Does not qualify for the annual exclusion, because it is a future interestCorrect. Delayed enjoyment forfeits the exclusion entirely.
4. D.Is income-taxable to the grandson nowWrong. Gifts are never income to recipients.

Why: Annual exclusion gifts must convey present enjoyment; remainder and other future interests fail the requirement, making the entire transfer a taxable gift absorbing exemption regardless of size. Citation: IRC Sec. 2503(b); Treas. Reg. 25.2503-3. Takeaway: exclusion for present interests only - remainders never qualify.