Gifts of $15k or more per gift receiver per year create no tax consequences (aka, $30k gifted to a married couple, $15k to each, would create no tax consequences and you can do the same thing the next year).

Gifts of greater than $15k to any on individual do not create immediate tax consequences, however, the consequences they do create are a little confusing (all numbers below relate to tax law as of 2021, if you are reading in a later tax year the exemption amount is likely higher, but the facts should otherwise be unchanged):

Every individual who dies away gets to pass on 11.7 million dollars in value to inheritors tax free. The 11.7 million dollars is called the estate tax exemption, because that amount is exempt from tax. Any amount above 11.7 million dollars is taxed at very high estate tax rates.

When someone gives a gift of money or stock prior to passing away, it doesn't create taxes for the giver or the receiver, but it lowers the estate exemption for the giver. So let’s say that your parent wants to give you $700,000. Since the estate exemption is $11,700,000 when that parents passes away their estate tax exemption $11 million, instead of $11.7 million. For many taxpayers this will not create any tax risk because they don't expect to have 11 million dollars to pass on to decedents upon their death.

Remember from above, you can give up to $15k to as many individuals as you want with no tax consequences to giver or receiver. In this example, however, a lot more than $15k was given. As a result a Gift Tax Return must be filed for each gift to an individual in excess of $15k. There is no tax due with the return, it just reports the gift so your estate exemption can be lowered.

Let’s say, now, that your parent gives you $700k, and then passes away and leaves you 12 million dollars. They have a remaining estate exemption of $11 million ($11.7 million, minus the $700k gift they gave while they were alive). So $1 million will be subject to estate taxes, ($12 million - remaining exemption of $11 million = $1 million).

Here are couple more considerations to keep in mind:

1. Mentioned above, but important enough to get a bullet: the annual Gift Tax exemption. Every year a taxpayer can give $15k in gifts to any number of individuals and this will not effect the Estate Exemption/no gift tax return must be filed. That's $15k per gift receiver, so a married couple can receive one $15k gift each, $30k total without any effect on the estate exemption and no gift tax filing.

2. For gifts above $15k, an informational return must be filed with the IRS. No taxes are due, it just reports that your exemption will be lowered by the amount of the gift.

3. Critical for estate planning: Stepped Up Basis. When anyone gives you a gift of anything other than cash, they also give you their basis in the asset gifted. Let’s say in the example above your parent didn’t give you $700k in cash, they gave you $700k in Apple stock. Let’s also say they originally bought the stock for $100k. If you now sell the stock, you’ll have a $600k taxable gain, because you got $700k for something that was bought for $100k ($700k-$100k = $600k gain)

In contrast, if your parent passes away and you inherit that same stock you receive what's called Stepped Up Basis in the stock, which means the basis becomes it's value on your parent’s date of death. So, if your dad bought the stock for $100k and dies and you inherit it and it's worth $700k, you get a $700k basis in it. If you sell it that day for $700k, your taxable gain is $0 ($100-$100 basis = $0). Stepped up basis represents significant capital gains tax savings and is something to consider carefully when optimizing your estate for the benefit of your decedents. Your investment advisor and your accountant are both great resources for this type of estate planning, and the sooner you begin the planning, the more options you will have.

Please contact our office if you have any further questions about gift taxes, the estate exemption, or any other tax matters.