Generally, you are subject to U.S. gift tax whenever you give property to individuals. Three types of gifts are exempt from the gift tax: (1) gifts to a spouse, (2) gifts to any individual of up to $10,000 in value per donee per year, and (3) direct payments for tuition or medical care for any individual.
- Marital gifts. You may give unlimited amounts of property to your spouse without gift tax if your spouse is a U.S. citizen. If your spouse is not a U.S. citizen (even if living in the U.S.), special rules and limitations may apply.
- $10,000 gifts. The gift tax does not apply to the first $10,000 in value you give to any individual in any year. This exemption applies to each donor and to each donee. For example, a husband and wife with three children may give their children up to $60,000 each year. Warning: If your gifts are made to a trust for the benefit of an individual, the trust must satisfy certain technical requirements in order to qualify your gifts for this exclusion from the gift tax.
- Tuition and medical care. The gift tax does not apply to payments you make for a person's "tuition" or "medical care" (including health insurance premiums). This exception requires that your payments be made directly to the school, doctor, hospital or insurance company. The exception is not available if you reimburse someone else for these expenses.
Your gifts generally are reportable by you as the donor on an annual U.S. Gift Tax Return (Form 709), due on April 15 following the year of your gift. You are not required to file a gift tax return, however, if your gifts in any calendar year do not exceed these exempt amounts.
Income Tax Issues
There usually are no income tax consequences as a result of gifts. You are not entitled to an income tax deduction for the gift, and your gift is not considered "income" to your donee. Of course, any income (e.g., dividends or interest) generated by the property after the gift is treated as income taxable to the donee.
Whenever you give property other than cash, your donee takes over your income tax basis in the property and may recognize capital gain on sale of the property (subject to a possible adjustment if you pay any gift tax on the gift). Accordingly, a number of our clients prefer to select for gifts property with relatively high basis and to keep low basis property (which at death will receive a "stepped-up" basis equal to its then fair market value, meaning that the old capital gain permanently escapes income tax).
Gifts of Real Property
As a general rule, under Proposition 13 California real property is not reassessed on an annual basis but only upon a "change in ownership." Property transferred to a spouse or to a trust for a spouse is exempt from Proposition 13 reassessment. Property transferred from a parent to children normally is subject to reassessment unless it comes under one of two broad exemptions (which generally includes step-children and in-laws) under Proposition 58 (an amendment to Proposition 13): (1) the parent's principal residence; and (2) other California real property, but limited to a lifetime aggregate assessed value of $1,000,000.
Mechanics of Cash Gifts
For gifts you make by personal check, the gift is "incomplete" until your check has been cashed or deposited and the funds debited from your bank account. If you die before the check clears your account, the gifted funds will be taxed in your estate. You may avoid this risk by making your gift by cashier's check because a cashier's check is immediately debited against your account (no matter when the donee deposits the check). Cashier's checks may be especially appropriate in "deathbed" situations or if the donee may not promptly cash your personal check.
Gifts From Revocable Trusts
If you hold assets as trustee of a revocable living trust, you should not make gifts directly from your trust. Instead, these gifts require two separate steps. First, you should change title to the property (including cash) from the trustee's name to your name individually. Second, you then may give the property to the donee. While cumbersome, this two-step process will minimize the risk that gifts made within three years of your death will be taxed in your estate.