What You Need to Know About Gifting Assets

By: Nicole T. Livingston – Principal and Senior Estate Planning and Elder Law Attorney with Elville and Associates, P.C.

January 8th — A question most often asked to an estate planning attorney is regarding gifting of assets.   There is a significant amount of confusion regarding gifting.  To begin, there is an annual gift tax exclusion amount, which is the amount of money you can give to another person without having to report the amount to the Internal Revenue Service (I.R.S.).  A gift can be in the form of cash, a check, a stock certificate, or real estate.  Any asset that you give to another person with the intent of relinquishing dominion and control is a gift.  This includes adding a person as the joint owner of a bank account or adding a person to the title of your car or a deed.   Most people do not realize adding a person as a joint owner of a bank account is a gift.   If the amount of the gift exceeds the annual gift tax exclusion, then the person who made the gift is required to report that excess amount to the I.R.S.  Currently in 2021, the annual gift tax exclusion amount is $15,000.00.

The person who receives the gift does not file a gift tax return nor do they have to pay income or gift taxes upon the receipt of the gift.  When you give more than the annual exclusion amount to an individual, you need to report the amount to the I.R.S. on Form 709.  The purpose is to keep track of the amount of money you gift during your lifetime.   You have a lifetime gift tax exclusion amount.  The lifetime amount is the same as the federal estate tax exemption.  The federal estate tax exemption in 2021 is $11,700,00.00 per person.  If you gift more than this amount during your lifetime, then you will owe a federal gift tax.  The rate is the same as the federal estate tax – which is 40%.  The I.R.S. requires you to file a Federal Form 709 for each gift that exceeds the annual gift tax exclusion amount.  Often, clients inquire if it is required if they do not have assets anywhere near the amount of the federal estate tax exemption.   My response is “Don’t mess with the I.R.S.”   

Basis is cost, the second most misunderstood aspect of gifting.   When you gift assets with appreciation such as stock or real estate, then the person who receives the asset also keeps the same basis that the giver of the gift had.   For example, if a stock was purchased for $10.00, then the person who receives the stock as a gift keeps the original cost basis of $10.00.   This is a significant issue with assets that have significantly appreciated.   When you receive stock or real estate as an inheritance (not a gift), then you as the receiver of the asset obtain a new cost basis.   The new cost basis is the fair market value of the asset upon the death of the original holder.   For example, if your dad dies and he leaves you stock that he purchased for $10.00 and now the stock is worth $100.00, then your new cost basis when receiving the stock upon his death will be $100.00.   If you immediately sell the stock for $100.00, then you do not have to pay any capital gains tax.   If your dad gifted the stock to you while he was alive and upon his death you sell the stock for $100.00 you will have to pay a capital gains tax on the difference between the original cost basis ($10.00) and the fair market value ($100.00) – a $90.00 gain.  The capital gains tax can be as high as 28%.  You need to pay both federal and state taxes.   In conclusion, it is best to receive appreciated assets as an inheritance rather than a gift.  

Before you add someone’s name to an account or a piece of property, consult an estate planning attorney.  Not only do we have to discuss whether you need to file a Federal Form 709 and what the cost basis ramifications are, there are elder law issues regarding gifting and applying for Medicaid.   Talk to an attorney before you gift any assets!

Nicole Livingston is a principal and senior estate planning and elder law attorney with Elville and Associates, an estate planning, elder law, and special needs planning firm based in Columbia and Annapolis.  To learn more about Nicole and her background, please click here.  To contact Nicole with questions or to set up a free initial consultation to begin your planning or review outdated documents, please email her at nicole@elvilleassociates.com, or call her at 443-393-7696.  

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