Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 The ins and outs of gifts and applicable taxes

- by Alan Duvall 

Published in Dayton Daily News  April 22, 2007 

To dispel a commonly held notion - In Ohio there is no gift tax for either the donor or beneficiary of a gift. 

There is an estate tax payable at death and today an individual can die with $2 million assets (exclusion) and pay no Federal estate tax.  With very minimal planning, a married couple can mutually own $4 million net assets and pay no Federal estate tax.

An individual may annually gift $12,000 assets to another individual without any tax effect.  Gifts to spouses receive unlimited exclusion.  Such gifts are not purely altruistic, they can provide a plan to reduce taxable estates.

“Gonna lose it in the end...give it all away.”  -Metallica

Assume a married couple wishes to annually gift a maximum excludable amount of assets to their married child.  The husband and wife can each gift $12,000 respectively to the son and daughter-in-law respectively – or $48,000 total per year – without any estate tax, or reporting, repercussions.

Of course tax rules are cluttered with exceptions.  Even if no tax is due, gifts of non-cash property such as autos or stock should be reported on annual returns with copies of formal appraisals attached in order to jump-start the IRS audit statute of limitations.  

Many clever individuals place excess assets in Family Limited Partnerships (or LLC’s) and secondarily gift fractional ownership interests. 

This strategy leverages the mathematical powers of minority and marketability discounts to effectively increase the amount of excludable gifts transferred each year. 

Annual gifts exceeding the $12,000 exclusion may still have zero immediate tax implications, but will reduce the donor’s lifetime estate exclusion of $2 million available at death. 

Gift beneficiaries usually acquire the “basis” of the donor.  Thus, if a donor paid $10,000 for a painting gifted to a child, the child likewise has a $10,000 cost assigned to the painting.  A weird exception exists for gifted assets later sold at a loss, whereby the beneficiary’s basis becomes the lower of value at time of gift, or donor cost.  By contrast, inherited property simply has a basis equal to value at date of death. 

The gift beneficiary also receives benefit of the donor’s holding period for long-term capital rates on disposition.

“If you give it all away – make it mine.”  Bee Gees

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.