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You and your spouse have elected to “split” gifts

Posted On: AUGUST 2021

Gift splitting can be a valuable estate planning tool, allowing you and your spouse to maximize the amount of wealth you can transfer tax-free. But in some cases, it can have undesirable consequences, so be sure that you understand the implications before making an election to split gifts.

Gift splitting is helpful if you wish to minimize taxes on gifts of separate property (as opposed to jointly owned or marital property). Suppose, for example, that in 2021 you give your child $30,000 in stock that’s your separate property. The annual gift tax exclusion shields half of that amount from gift taxes, but the remaining $15,000 is taxable. However, if you and your spouse elect to split gifts, then half of the gift is deemed to be from your spouse and is shielded from tax by his or her annual exclusion.

It’s important to understand that when you make an election to split gifts on a gift tax return, it applies to all gifts made by you or your spouse during the year. In some cases, this can have unintended consequences, especially if you plan to leverage the current $11.7 million federal gift and estate tax exemption amount. Because the exemption is scheduled to be cut in half after 2025, many people are taking advantage of the exemption by making large gifts to their loved ones before the current exemption sunsets in 2026. But if you elect to split gifts, you risk losing the benefit of the increased exemption.

Suppose that in 2021 you transfer interests in your separately owned business valued at $11.7 million to your children. If you and your spouse elect to split gifts this year, then each of you is deemed to have made a gift of $5.85 million. Assuming that the exemption amount drops to $5.85 million in 2026 (ignoring inflation adjustments) you and your spouse will both have used up your exemptions. Had you not split gifts in 2021, however, you would have enjoyed your full increased exemption amount, while preserving your spouse’s $5.85 million exemption.

© 2021