Gift Splitting: Husband and Wife Combining Annual Gift Tax Exclusions

An in-depth explanation of gift splitting, where a husband and wife can combine their annual gift tax exclusions and unified estate and gift tax credits to jointly give larger gifts.

Gift splitting is a tax strategy that allows married couples to combine their individual annual gift tax exclusions and unified estate and gift tax credits to make larger tax-free gifts to a single recipient. This provision helps in maximizing the amount that can be transferred tax-free to family members or other beneficiaries.

How Gift Splitting Works

Annual Gift Tax Exclusions

As of 2011, each individual can give up to $13,000 per year per recipient without incurring gift tax. This amount is known as the annual gift tax exclusion. When a husband and wife elect to split gifts, they can combine their exclusion amounts, effectively allowing them to gift up to $26,000 annually to any one recipient.

Example Calculation

If a husband makes a $26,000 gift to their child, gift splitting allows the couple to signify that half of the gift comes from each spouse. This way, neither spouse exceeds their $13,000 individual exclusion, and the entire $26,000 gift is free of gift tax.

$$ \text{Husband's Portion} = \$13,000, \; \text{Wife's Portion} = \$13,000 \Rightarrow \text{Total Gift} = \$26,000 $$

Unified Estate and Gift Tax Credits

In addition to annual gift tax exclusions, couples can utilize their unified estate and gift tax credits to make larger tax-free gifts during their lifetime or at death. These credits are combined to allow for a higher exemption limit.

Special Considerations

Consent Requirement

To engage in gift splitting, both spouses must consent by filing IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form documents the gift-splitting election and must be filed for each year in which gift splitting is used.

Assets and Gift Splitting

Gift splitting can occur even if only one spouse has sufficient assets to make the gift. The assistance from the spouse with fewer assets allows the gifted amount to be maximized under the IRS regulations.

Historical Context

Gift splitting has been part of U.S. tax law for several decades. Over time, the annual exclusion and the unified credit amounts have been adjusted to account for inflation and changing economic conditions.

Applicability

Gift splitting is commonly used in estate planning to:

1. Maximize tax-free transfers to heirs.
2. Effectively manage estate size to minimize estate taxes.
3. Facilitate property and asset shift without incurring significant tax liabilities.

Related Terms

• Unified Credit: The cumulative credit available against the combined gift and estate tax.
• Annual Exclusion: The annual limit each taxpayer can gift without gift taxation.
• IRS Form 709: A form used to report gift tax and generation-skipping transfer tax to the IRS.

FAQs

Do both spouses need to sign IRS Form 709?

Yes, both spouses must consent and sign IRS Form 709 to elect gift splitting for a particular tax year.

Can gift splitting apply to non-family members?

Yes, gift splitting can apply to gifts made to any recipient, not just family members, provided all IRS conditions are met.

What happens if the gift exceeds the annual exclusion?

If the combined gift amount exceeds the annual exclusion, the excess is subject to gift tax unless it is covered by the couple’s unified credit.

References

1. Internal Revenue Service (IRS). “Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.”
2. U.S. Code, Title 26, Subtitle B, Chapter 12: Gift Tax.

Summary

Gift splitting is a strategic tax planning tool that enables married couples to maximize their annual gift tax exclusions and unified estate and gift tax credits. It requires both spouses to consent to the split and can significantly enhance estate planning efforts. This strategy is grounded in U.S. tax laws and is crucial for ensuring more substantial tax-free transfers to beneficiaries.