Making a gift, intentionally or by accident, can make you liable for additional taxes.
The following is a transcript of the video above:
Can the government take money from you for giving money for someone that you love? My answer is absolutely yes. And it's called the gift tax.
Hello, this is a State Planning Weekly, episode number 29. I am your host, Don Rolfe, the owner and founder of Northwest Legal Planning and Estate Planning and Probate Law Firm located in West Linn, Oregon, and serving the greater Portland Metro Area.
The gift tax, what is it? Does it make sense? In my mind, it doesn't. But, we all know that the government is going to get its cut out of every transaction that it possibly can. So all the way from the federal, state, county, city, there's always an entity looking to get their cut of any changing of value. So whether that be income, capital gain, and yes, even gifts.
The federal government has a gift tax. How does it work? Well, if you give money to someone during the year, and it exceeds your annual gift tax exclusion amount, which right now in 2019 is $15,000. Anything above that can be taxed at a rate somewhere depending upon how much you gift between 18 and 40%. The person that is giving the gift is responsible for paying that tax. However in some unique circumstances, the person receiving the gift could be responsible for that.
As to why we have this, like I said, the government wants to take its share. It's looking for any transaction where it can dip its hand in and take a little bit. But why do we and this is why we worry about it, that we want to be able to transfer wealth to our family, or our friends, and we need to do it in such a way as to be, as to recognize that this gift tax exists, and to make sure that if we are making a taxable gift that we're filing the appropriate return for it.
So where does this topic come up for today? Well I spoke with someone last week and they had received the bulk of an estate because they were the sole beneficiary on some life insurance and retirement accounts and so forth. And they were the only person in the family that received anything. However, they felt that the person who had passed away would have wanted others in the family to receive some of those assets, a benefit from the deceased person's estate. The deceased person did not have a will. They did not have a trust. But the person who received everything thought that they would probably want some of that to go to other people. It was a substantial amount of money. And so this person, thinking that they were doing the right thing, thinking that you know everyone should share in this, wrote some checks that were above the annual exclusion amount. And unbeknownst to them, they now are required under federal tax law to file a gift tax return. And they have two options. They can either pay the tax that would result from making those gifts, or they can reduce their lifetime exclusion amount, by the amount of those gifts, and make it so that those gifts are tax free.
Now, this is one of the things that I try to avoid and can avoid very easily when putting together estate plans for my clients. I often times give people that come in, and their seeking information about what to do for an estate plan and they tell me what they've already put into place, to try to alleviate the necessity for having to go through probate and all of those sorts of things.
One of the things that I hear often is that a parent will put a child as a co-owner on their checking account and the discussion between the parent and the child is that when the parent passes away that child will divi whatever's in that account amongst their brothers and sisters and other family members. This raises two potential issues with the gift tax. First, when the parent puts their child as a co-owner on that account and gives them free access to everything that's in there, which generally what it means to be a co-owner on account, that is a gift. And that is a taxable event. So immediately, when putting that child on to that checking account or savings account or whatever it is, if that child has access to those funds, that is a taxable event. That is a taxable gift. So if it's above that exclusion amount, $15,000 per donnee, right now in 2019, then technically, they would have to file the appropriate gift tax return and claim that with the IRS. Then after mom or dad passes away, and that account, by operation of law passes to the sole surviving joint account owner, which is the child. Let's say there's a $150,000 in there. They have two siblings, so they're going to give $50,000 to each of their siblings, this again, raises a taxable event. Each of those $50,000 checks if they would write one to brother and one to sister, is a gift which exceeds the annual exclusion amount. So child who was the joint owner is now responsible for the gift tax on those two gifts. It's really a situation that most people do not think about but it's easy to get caught in a tax trap, almost, by thinking that you're getting around the difficulties of administering an estate by doing some planning like this. By putting people as joint owners, and really you're doing a disservice to the child that you're bringing into it. And that child doesn't recognize what they're getting themselves into.
Another one I see a lot is that they've just done a quit claim deed to child number one for their house. So they're making a present, interest, gift of the house, making that child the sole owner of it, or maybe even co-owner, with mom or dad. And that is a gift as well. And this one is has the same issues as the checking account but it has another one that's lumped on top of it. Mom and dad bought the house in 1980 for $50,000. They transfer interest to child number one, in 1995 and the value of the house is $200,000. The basis for that child does not get stepped up then after that.
So this is a bit confusing and I'm sorry if it's a little long winded. If you'd like to have a specific example explained to you by me, one-on-one, we can set that up by going to, you can go to estateplanmeeting.com. Schedule a half hour consultation with me on the phone or in person, and I can answer a specific question for you or any other estate planning question.
So the step up in basis basically means that if it were not transferred during the lifetime, mom and dad bought it in 1980 for 50,000. The second of them passes away in 2000 and the house is worth $250,000. The kids inherit the house. And their new basis is $250,000. So when they go to sell it, the next day. They sell it for $250,000. There's no capital gain tax on that. However, if it's transferred during the lifetime, that basis gets locked in. And then when mom and dad do pass away, the child is looking at having a capital gain on that property when they sell it, and having to pay an additional tax on top of the gift tax that should have been paid by mom and dad when they gifted the house during their lifetime to their child.
It really is just a mess. You would think that giving money away would be a good thing, that the government wouldn't step in. But every gift that you give someone, adds a little bit to that annual exclusion. So, if grandma and grandpa give their grandson a $100 present for Christmas, that is included in the annual exclusion amount. So if they wanted to gift the full $15,000, they would only be able to write a check for $14,900 to their grandchild in order to come in under the gift tax exclusion. If they wrote a check for $15,000, technically, they would have to claim that $100 on a gift tax return for that year.
I know, it's confusing. It doesn't make sense. But the good thing is is that we can fix it. We can make sure that these problems do not arise and if something has happened already that's a taxable event, there is a chance that we could unwind it to say it was a mistake and get everything back to where we're not having to pay this gift tax. You're not having to file that gift tax return. You're not having to claim a portion of your lifetime exclusion amount because a mistake was made.
So if this is something that you have done, or you received a large gift, or mom and dad have put you on their joint trust, or their joint checking account with them, or on their house, you need to have a conversation with them and see if that's something that needs to be changed. Or if you're thinking about doing this, before you do, talk to someone like either me, or another estate planning attorney or a tax advisor. Someone with a little bit of knowledge in this area to make sure that you know exactly the implications of making a gift, that you are contemplating.
And a lot of times, people don't even think of it as a gift. They think of it just, you know, I'm doing the right thing. But unfortunately, the law is pretty black and white as to what is and isn't taxable. So make sure you get some knowledgeable eyes on it and a valid opinion about it before you actually take the step to do it.
Again, if you have any specific questions for me, I would really like to speak with you. You can get a hold of me, and set an appointment by going to myestateplanmeeting.com. Right there you can schedule it at our phone or in-person consultation. It's absolutely free, and you schedule it right on the web page. It shows up on my calendar, and if you're coming in, I'll see you when you get here. And if it's a telephone call, I'll call you at the time that you have indicated.
Again, I am Don Rolfe, Estate Planning and Probate Attorney in West Linn, Oregon. Until next time, take care. Bye.
Father, husband, entrepreneur, and owner of a trivia filled brain. I help families and individuals plan for the unexpected and end of life. Schedule a Complimentary Strategy Session to chat with me, get answers to your questions, and find out about your Estate Plan options.
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