The annual gift tax exclusion allows you to transfer up to $15,000 per beneficiary gift-tax-free for 2020, without tapping your lifetime gift and estate tax exemption. And you can double the exclusion to $30,000 per beneficiary if you elect to split the gifts with your spouse.
It’s important to understand the rules surrounding gift-splitting to avoid unintended — and potentially costly — consequences.
Understanding the Pitfalls
Common mistakes made when splitting gifts include:
Failing to make the election. To elect to split gifts, the donor must file a gift tax return and the nondonor must consent by checking a box on the return and signing it or, if a gift exceeds $30,000, filing his or her own gift tax return. Once you make the election, you must split all gifts to third parties for the year.
Splitting gifts with a noncitizen. To be eligible for gift-splitting, one spouse must be a U.S. citizen.
Divorcing and remarrying. To split gifts, you must be married at the time of the gift. You’re ineligible for gift-splitting if you divorce and either spouse remarries during the calendar year in which the gift was made.
Gifting a future interest. Gift-splitting can be used for gifting a future interest. However, only gifts of a present interest qualify for the annual exclusion. So, a gift in trust only qualifies for the annual exclusion if the beneficiary receives a present interest — for example, by providing the beneficiary with so-called Crummey withdrawal rights.
Benefiting your spouse. Gift-splitting is ineffective if you make the gift to your spouse, rather than a third party; if you give your spouse a general power of appointment over the gifted property; or if your spouse is a potential beneficiary of the gift. For example, if you make a gift to a trust of which your spouse is a beneficiary, gift-splitting is prohibited unless the chances your spouse will benefit are extremely remote.
Be aware that, if you die within three years of splitting a gift, some of the tax benefits may be lost.
Contact your trust and estate attorney and us with any questions regarding making gifts. You can reach me at SDitman@BerdonLLP.com or contact your Berdon advisor.
Scott T. Ditman, a Senior Advisor to the Personal Wealth Services Practice at Berdon LLP, works with high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.