When are You Required to File a Gift Tax Return?

The IRS wants to know how much you’re gifting over the course of your lifetime. This is because while gifts may be based on generosity, they are also a strategy for avoiding taxes, including estate taxes, reports The Street in a recent article “Do I Need to File a Gift Tax Return?”

Knowing whether you need to file a gift tax return is relatively straightforward. The IRS has guidelines about who needs to file and who does not. Your estate planning attorney will also be able to guide you, since gifting is part of your estate and tax planning.

If you give a gift worth more than $16,000, it is likely you need to file a gift tax return. Let’s say you gave your son your old car. The value of used cars today is higher than ever because of limited supply. Therefore, you probably need to file a gift tax return. If the car title is held by you and your spouse, then the car is considered a gift from both of you. The threshold for a gift from a married couple is $32,000. Make sure that you have the right information on how the car is titled.

What if you added a significant amount of cash to an adult child’s down payment on a new home? If you as a member of a married couple gave more than $32,000, then you will need to file a gift tax return. If you are single, anything over $16,000 requires a gift tax return.

529 contributions also fall into the gift tax return category. Gifts to 529 plans are treated like any other kind of gift and follow the same rules: $16,000 for individuals, $32,000 for married couples.

What about college costs? It depends. If you made payments directly to the educational institution, no gift tax return is required. The same goes for paying medical costs directly to a hospital or other healthcare provider. However, any kind of educational expense not paid directly to the provider is treated like any other gift.

Do trusts count as gifts? Good question. This depends upon the type of trust. A conversation with your estate planning attorney is definitely recommended in this situation. If the trust is a “Crummey” trust, which gives the beneficiary a right to immediately withdraw the gift put into the trust, then you may not need to file a gift tax return.

A Crummey trust is not intended to give the beneficiary the ability to make an immediate withdrawal. However, the withdrawal right makes the gift in the trust a “current gift” and it qualifies for the annual exclusion limit. Recategorizing the gift can potentially exempt the person giving the gift from certain tax obligations. Check with your estate planning attorney.

Even when filing a gift tax return, the amount of tax being paid is usually zero. This is because the gifts are offset by each person’s lifetime exemption. The IRS wants these returns filed to keep track of how much each individual has gifted over time. Unless you are very wealthy and making gift transfers from a family trust or to family members, it is not likely you will ever end up paying a tax. You are, however, required to keep the IRS informed.

Reference: The Street (March 31, 2022) “Do I Need to File a Gift Tax Return?”

What is the Difference between a Trust and a Will?

Trusts and wills are two different ways to distribute and control your assets after your death. They have some key differences. Family trusts and wills are both worthwhile estate planning tools that can make sure your assets are protected and will pass to heirs the way you intended, says MSN’s recent article entitled “Family Trusts vs. Wills: What Are the Differences Between These Estate-Planning Options?”

This article tells you what you need to know about the differences between family trusts and wills to help you avoid estate planning mistakes.

Remember that without a will, the state probate laws will determine what happens to your assets. It may or may not be what you want. In contrast, a will lets you state to whom you want to distribute your assets.

Note that a trust permits the grantor (the person making the trust) to do what he or she wants with the assets. A trust also avoids probate.

A family trust is a wise choice for those who want to provide for the management of their assets if they become incapacitated, people interested in keeping information about their assets and who inherits those assets private and those who have a significant number of assets or a large estate. Here are some other situations in which a family trust would be appropriate to use:

  • Asset protection from creditors and divorce
  • For disabled beneficiaries who need to qualify for government benefits
  • For tax-planning; and
  • For cost and time efficiency over a lengthy probate process.

Everyone should have a will. It’s a way to leave bequests, nominate guardians for a minor child and an executor.

If you have a family trust, you still need a will. There may be some assets not owned by the trust, such as vehicles and other personal property. There may also be payments due you at your death. Those assets must go through probate, if not arranged to avoid probate.

Once that process is complete, the assets are distributed to the family trust and are governed by its provisions. This is what is known as a “pour-over will” because the assets “pour over” to the family trust.

Contact an experienced estate planning attorney to discuss the estate planning options available for you and your situation.

Reference: MSN (Aug. 27, 2021) “Family Trusts vs. Wills: What Are the Differences Between These Estate-Planning Options?”