Gift Wisely: Navigating the Technicalities of Smart Giving

Gift Wisely: Navigating the Technicalities of Smart Giving

By Estate Planning Practice Group

Gifting should not be complicated, right? Gifting can actually be a challenging process and should not be done without sufficient forethought and wise counsel. This article covers the basics of gifting, trouble areas to avoid in gifting, and some gifting opportunities.


As of January 1, 2006, the annual gifting exclusion was increased from $11,000 to $12,000. Thus, each year an individual can transfer $12,000 to any individual without the need to report the gift to the IRS. A husband and wife can therefore transfer $24,000 to a child, grandchild or any other individual. If only one spouse makes the gift, there is an exception that allows for the gift to be “split” so the gift is considered to come $12,000 from each spouse.

At times, an individual desires to gift in excess of the annual gifting exclusion. When gifting over $12,000, the gift must be reported by filing a Federal Gift Tax Return (IRS Form 709). Even though a gift tax return is required, gift tax will not be due unless an individual has made lifetime gifts exceeding $1 million (which is referred to as the lifetime gifting exclusion). Additionally, “gift splitting,” as described above, also requires the filing of a Form 709. However, if an individual elects to “gift split” on any gift in a given year, then every gift made in that year must also be split. Further, Form 709 can be filed when a hard-to-value asset is being gifted. By filing the Form 709, the IRS is on notice of the gift, and as long as you have adequately disclosed the nature of the gift the IRS will only have three years to contest the valuation of the gift. Finally, if a gift is made that exceeds the annual exclusion ($12,000), you need to be aware that the excess over the annual exclusion reduces the amount you can transfer at death without incurring federal estate tax.


One area to be wary of when gifting is the issue of gifting an asset with a low basis. An asset’s basis is defined as the asset’s purchase price plus capital improvements. The fundamental rule is that a gifted asset is passed to the recipient with a “carry over” basis (i.e., the donor’s own basis) and an inherited asset is passed with a basis adjusted to the fair market value as of the date of death. For example, if a piece of land is purchased for $100,000 and in 2006 it is worth $800,000 and that same land is then gifted to a child, then the child will take the basis of $100,000 and upon sale there would be capital gains tax on $700,000 (a federal and state tax of approximately $168,000). However, if that same piece of property was inherited by the child then the basis would be stepped up to the fair market value of the property as of the date of death. If the property were later sold, there would only be capital gains on the value above the date of death value. Consequently, gifting any asset that has appreciated in value must be done with appropriate caution.

The generation skipping transfer tax (“GSTT”) is another area for caution. Gifts made to a generation two steps below you (i.e., grandchildren) has the potential to generate an additional 46% tax. Every individual is allowed a generation skipping exemption amount which is equal to the federal estate tax exclusion ($2 million in 2006). However, gifts under the annual gifting exclusion are permitted without reducing the generation skipping transfer tax exclusion. Consequently, gifting over the annual gift exclusion to the “skip” generation must be closely monitored by your advisors.

Despite its complexity, gifting is still an effective estate planning tool. First, gifting can be used to lower the value of an estate and consequently lower the estate tax. Currently, Oregon does not have a gift tax. Thus, gifts made during life do not lower the Oregon estate tax exclusion ($1 million for 2006). For example, an individual with an estate of $1.8 million could gift $800,000 in 2006 and still have an Oregon estate tax exclusion of $1 million. In this example, the $800,000 gift would reduce the donor’s Federal estate tax exclusion, but because the donor’s estate was already under the federal exemption ($2 million), the gift does not produce a federal tax and may eliminate the Oregon tax entirely.


Another gifting opportunity involves gifting in a manner that does not reduce either your federal estate tax exclusion or your lifetime gifting exclusion. First, any amount can be given to charity without reducing either the Federal estate tax or lifetime gifting exclusions. This can be a valuable opportunity for the entire family to become involved with charitable giving. Second, all gifts made directly to a medical facility or qualified educational facility for the payment of either medical or education expenses are also transfers that will not reduce the Federal estate tax, lifetime gifting exclusion or the annual gift exclusion.

Along with complexity comes great opportunity. By knowing the rules, you can make gifts that accomplish your goals and reduce taxes. Please contact our office if we can be of assistance.