Q: My husband and I have three adult children. Starting two years ago we have been making annual gifts to them. We use the maximum IRS allowed amount, which is now $15,000 per year from each of us. To easily remind ourselves of the gifts we have been making them on each child’s birthday. We made one gift in April and one in June. Our third child was born in September and we planned to make a gift to her at that time. My husband passed away unexpectedly in August. I did not make the September gift because I am unsure of what to do. All of our free money is held in a living trust. We were both the trustees and I am now the only trustee. So I control all the funds we have used to make these gifts and I could write my daughter a $30,000 check. I told her I am holding off to find out if I can make the gift for both me and my husband. I searched the IRS website and found that I can file a joint return for the whole year because my husband was alive for part of the year. There was no information about whether I can also make a gift on his behalf. If I am limited to $15,000 I don’t know what to do. This would not be fair to my daughter since her siblings each got $30,000.
A: You cannot make a gift on your husband’s behalf. The gift had to be completed by the time of his death. Generally this means that any check that even he himself wrote had to be cashed by his death.
This does not mean that you cannot give your daughter $30,000. I’ll walk through the rules and what you could do step by step.
First, the $15,000 annual gift figure is what you may give without the need to file a gift tax return (Form 709). You can give any amount to your child – the government does not try to restrict that.
The government can only tell you what the tax consequences of a gift are. If it is $15,000 or less for each recipient, per year, you don’t have to report the gift.
If more than $15,000 you must file Form 709. This is due when your tax return for the year of the gift is due but it is filed separately. Generally no tax is due – the form just reports the fact that the gift was made. IRS wants to track that in case it affects a later estate tax.
Everyone is allowed to transfer as much as $11,580,000 free of any gift or estate tax. This is the cumulative amount of transfers during life and at death. It excludes the $15,000 annual amount that does not have to be reported to IRS.
If you now give $30,000 to your September birth daughter, you will need to file a Form 709 by April 15, 2021. You will not pay any transfer tax. You probably already know that your daughters will never pay income tax on receipt of gifts.
If you do not have a very large estate, but can afford the gifts, you can continue to give each child $30,000 each year. You will simply have to file Form 709. You could ask a CPA or other tax professional for help preparing it.
If your husband never made any taxable gifts during his life he has the ability to transfer $11,580,000 following his death free of any estate tax. Any of his property (separate and half of the community) that passes to you is excluded from this number because transfers to spouses are deducted from the amount subject to tax.
You may consider filing an estate tax return (Form 706) for your husband. This is required if the estate exceeds $11,580,000. But it may also be filed solely to allow him to effectively pass his exemption amount to you.
Filing the Form 709, due nine months after death, will raise the amount you can transfer tax free to $23,160,000 (two times $11,580,000). This might not be needed but you should at least consider the option.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.