I don’t remember the exact year…maybe 1982 or 1983. As the youngest of four children being raised by a single mother, Christmas around our house was usually not very extravagant. We didn’t have a large, extended family, so there usually weren’t a ton of presents under the tree from grandparents, aunts, uncles, cousins and such. However, this particular Christmas morning was particularly memorable.
I remember my brother waking me up. He was six years older than me, yet despite his more mature perception of how the gifts appeared under the tree every year, he still had not completely abandoned all hope and belief in the magic of Christmas. I was still a true believer…and admittedly, even today I find myself getting caught up in the spirit of the season with youthful anticipation for the big night along with my two daughters and new baby boy. This particular morning my brother was unusually giddy as he snatched me out of bed and drug me down the hall.
The lights of the Christmas tree were still bright in the dark room. Seeing the lights and the tree was the first moment I realized what my brother was so excited about. I was both relieved that the house was not on fire and irritated that I had been snatched out of bed and drug down the hallway. However, relief and irritation gave way to astonishment and elation when I finally noticed the bounty that had been placed under our tree. And that was when I became my brother’s accomplice in the ambush on our mother as we woke her with a greeting similar to that I had received just minutes earlier.
As we grow older and have children of our own, the thrill of receiving presents at birthdays and Christmas is often trumped by the gratification of putting a smile on a loved one’s face when they react to opening a gift that you have given to them.
As an attorney I have found that the act of giving is not reserved to birthdays and holidays for many of my clients. In some cases the gift is part of a financial planning or asset protection strategy. In other cases it is part of a series of end of life decisions where parents and grandparents attempt to distribute certain assets to their intended beneficiaries before they pass away. Sometimes the gift is cash. Sometimes it is property, both real and personal. What many clients are surprised to find out is that some gifts, depending on the nature of the gift and who the recipient may be, are actually subject to both federal and state gift taxes.
Never heard of a “gift” tax? You’re not alone.
The most common way people find out about the gift tax is after a loved one has passed away and they are going through the probate process. As part of filing an inheritance tax return, the personal representative of the estate must disclose if there have been any “gifts” made by the decedent within the last three years prior to their death. However, most gifts are not subject to the gift tax and most estates are not subject to the estate tax. For example, there is generally no tax if you make a gift to your spouse, a charity, or a political organization. However, if you make a gift to someone else whether or not the gift tax applies depends upon the nature and value of the gift.
The federal gift tax was originally established by Congress in 1932 as a back stop to the federal estate tax. The purpose was to prevent large estates from avoiding the estate tax by simply giving the money away prior to death. The initial gift tax rate was 25 percent under the estate tax rate with an annual exemption of $50,000 dollars. Of course, the intention was to rapidly increase revenue during the Great Depression. Unfortunately, like most new taxes established by Congress, the gift tax has never completely gone away even though the original purpose for the revenue has been extinct for nearly 70 years.
While the gift tax has never been repealed, in 1976 Congress unified the gift and estate taxes essentially eliminating the donor’s ability to circumvent the estate tax. The rate is now based on a sliding scale ranging from 18 to 35 percent of the value of the gift. The current annual exemption for both federal and state gift tax (Tennessee does impose its own state gift tax) permits you to give up to $13,000 per year to your spouse, child, sibling, son-in-law or daughter-in-law, or stepchild. The exclusion applies to each recipient. Therefore, if you had five children you could give up to $13,000 per year to each child for a total of up to $65,000 in annual gifts without paying the gift tax. If you are married, both you and your spouse can make separate gifts to the same individual. So, in the example above if you and your spouse each gave $13,000 to your five children, totaling $26,000 to each child, you could gift a total of $130,000 per year without having to pay the state or federal gift tax. There is a second, much smaller, exemption for gifts to non-family members or relatives outside of the list above.
One of the more common situations I encounter where the gift tax may apply is when momma or daddy have reached the age where they begin to have concerns about future health issues, nursing homes, TennCare, etc. Generally, they come to my office asking questions about giving their farm, or a portion of the farm, to their children. There are issues with these kinds of transfers that have been discussed in other articles in this column, but the applicability of the gift tax is generally a total surprise to most people.
Making a gift during your lifetime, what is commonly referred to as an inter vivos gift, could be advantageous to individuals who anticipate the total value of their estate will exceed the exemption for any state or federal inheritance taxes that may be due. Whether the gift be in the form of cash, real estate, stocks, bonds, livestock, crops, farm machinery, automobiles, boats, RVs, jewelry or antiques, with proper estate planning and tax advice, you can avoid Uncle Sam taking a significant portion of your estate assets that you intended to leave to your family and loved ones. By setting up an estate plan that includes inter vivos gifts, you can experience the joy of being there when your family member or loved one receives the gift while also strategically reducing the value of your total estate to avoid the payment of inheritance taxes when you pass away.
If you have made a gift in excess of the annual exemption, or you are thinking about making such a gift, consult your tax professional and/or attorney to establish a plan that works best for your particular situation.
About that childhood ‘nirvana’…
And, in case you’re wondering, the source of nirvana experienced by my brother and I on that Christmas morning…matching Star Wars Millennium Falcons, X-Wing Fighters, and Imperial Fighters with all the necessary action figures and accessories! Thankfully, there is no gift tax on the lifelong memory my brother and I will share forever.
The foregoing article is not intended as, nor shall be used, relied upon, or otherwise construed as legal advice or an attorney-client relationship.