Are Holiday Gifts Subject to the Gift Tax?

The short answer: yup! But the more nuanced answer is that if you are giving a gift or receiving a gift in California, you probably won’t end up paying any gift taxes on holiday gifts.

Let’s take a look at the mechanics of a holiday gift. Without getting overly complicated, a holiday gift is a donative transfer of an asset from one person (donor) to another (donee). A “donative transfer” simply means that no one traded you or paid you anything for it (as in, it’s a true gift). Just like the government taxes your income (income taxes), certain goods sold (sales tax), and also real estate that you own (property taxes), it also taxes the donative transfer of assets. So the gift tax is a transfer tax.

A couple of details: the gift tax is only imposed by the federal government--so only the IRS will tax you, not the state of California--and it’s only imposed on the donor (the person giving the gift). If you receive a gift, and you live in California, you’re not on the hook for transfer taxes.

There are two types of gifts: those you give during life (intervivos) and those you make after you die (like through a will or trust). We’re going to focus on intervivos gifts since most holiday gifts are given during life.

Here’s why most of you will not owe any gift taxes on your holiday gifts. The federal government has this nifty rule called the “annual exclusion”. What that means is that each of you can make a gift up to $15,000, per year, per recipient, and not owe any taxes on that gift. In fact, the IRS doesn’t even want to know about it! You don’t have to report it. Married couples can combine that exclusion amount to $30,000 to one recipient, per year, and still fall within the same rule. So put another way, you’d have to be awfully generous this holiday season to have to deal with gift taxes.

Well, what if you are that generous? What happens if you make a gift that exceeds the annual exclusion?

Now we get to the “unified credit” or estate tax exemption amount. The unified credit is an amount the federal government allows you to gift during your entire lifetime, and combine that amount with whatever you own when you die, and not pay any transfer taxes if you are below the unified credit amount. It’s an amount set by law, and it increases every year based on inflation. The credit amount in the year that you die is what is applied. The exemption level for 2018 is $11.18 million. For example, let’s say you die in 2018 (sorry to bum you out!)--if the total of what you gifted during your life, and what you owned at death is less than $11.18 million then you would pay ZERO transfer taxes. For 2019, that number increases to $11.4 million.

Let’s recap: if you make a gift to someone that’s valued at $15,000 or less, per person, you don’t have to report it, and no transfer taxes are owed, and there’s no reduction in your unified credit amount. If you make a gift in excess of $15,000 but less than the unified credit (currently $11.18 million), you won’t owe any transfer taxes, but you’ll need to report it to the IRS. They’ll walk over to your file, and deduct the amount of the gift from your unified credit amount. For example, if you gift $20,000 to your favorite niece this year, you would report a $5,000 gift ($20,000 - $15,000 exclusion amount) and the IRS would walk over to your file and deduct $5,000 from your $11.18 million unified credit. Only $11.175 million left to give before you pay transfer taxes!

Happy Holidays! And don’t forget to send those ‘thank you’ cards!

Married: You Either Are or You Aren't.

Have you heard that story about the couple who lived together for seven years, and then they accidentally became married? Or what about the one where your friends were in a “common law” marriage?

Well… they’re both bogus concepts. At least in California. We don’t even know where the “seven year” part came from.

In California, you’re either married with a state license and certificate from the county clerk (and a few other requirements) or you’re not married. Period. There’s no intermediary status. There’s no “common law” marriage. You can’t accidentally find yourself in a marriage. The law doesn’t care how long it took your significant other to propose, or the size of the ring… or whether there was a ring at all! There are a dozen or so states that recognize “common law” marriage, but we’re not one of them.

So how does the law view your live-in significant other? You know, the person you’ve been living with romantically for years?

To put it simply: short of marriage, the law views your significant other as a roommate. It doesn’t matter how long you’ve lived together, whether you have children together, or whether you share ownership of property. You need that marriage license in order to be considered lawfully married.

Married couples enjoy benefits that unmarried people do not. Married couples are legally considered family (for example: when visiting one another in a hospital, or for inheritance purposes, or for health care benefits). Unmarried couples cannot own community property. That’s only for married couples, too. Also, tax treatment for married couples is dramatically different than for an unmarried couple.

You may have heard of “Registered Domestic Partners”. Or just “domestic partners”. But that has its own set of requirements, and is governed by state law. It doesn’t happen accidentally or automatically. And it’s only recognized in a few states (including California), but not by the federal government, like marriage is.

A couple’s decision not to marry does not detract from the love, trust, support or any of the interpersonal relationship benefits married couples can share. However, it is important for an unmarried couple to know that the law treats couples in vastly different ways based solely on marital status. A marriage certificate may literally be “just a piece of paper” but that piece of paper has important legal ramifications.

If you would like to discuss how your situation would be affected by getting married (or not), please contact us for a free consultation.

Why Would A Married Couple Need an Estate Plan?

A friend of ours recently contacted us with a question that comes up frequently enough that we wanted to share it with you:

We are married and everything that we own is held jointly/as community property. We own a house, but we don’t have any kids and we don’t have debt. Do we need a will? Do we need a trust? Why?”

To the first question: Yes. You need a will whether you have a trust or not. (Click here to read our post explaining what a will does. And click here to read about intestacy.)

To the second question: Yes. Because….

1. Incapacity. Incapacity doesn’t just mean “coma,” (although that counts too). It could be that you went into surgery and had a bad reaction to the anesthesia so you can’t quite function as you ordinarily would. Or, it could be dementia. It could be temporary, it could be permanent. But a will doesn’t let you address incapacity situations. A trust allows you to plan for incapacity. It allows you to plan for who will take care of your assets and use your assets for your benefit when you are still living. Just because your spouse is on title doesn’t mean your spouse has all the necessary authority to care for you in the event of your incapacity. (Click here to read our previous post explaining incapacity.)

2. Contingency planning. Wills do not address all contingencies. But trusts allow for lapses and contingency planning. What if your spouse becomes incapacitated after you do? What if your intended beneficiary is still a minor (younger than 18 years old)? What if your intended beneficiary has a substance abuse or gambling issue later on? What if your intended beneficiary has special needs and requires means-tested government assistance? What if your beneficiary predeceases you? These issues can be planned for in a trust in advance.

3. Probate. You’ve probably heard the term “probate” with some negative connotation. (Click here to read our previous post explaining probate.) If you have a trust, you avoid probate. Probate takes about 18-24 months; it’s a public proceeding; and it’s expensive.

So even if you are married and hold everything jointly, that may only ensure that your spouse receives your assets upon your death. But so many other scenarios can occur. We might recommend you consider a trust given your situation and desires. All of our recommendations depend on your specific family and estate planning goals. To ascertain what is best for you we would need to meet with you, in a free consultation, to understand your goals, assess and explain your options, and provide you with a recommendation tailored to your situation. Call or email us today.