We talk often about the use of gifting as an estate planning tool but always caution that individuals should consult with an attorney and/or an accountant before doing so to ensure it is done properly. It is particularly important to consult with an attorney or an accountant when a married couple wishes to make a gift that will be split between the two of them.
Let’s take the scenario that a mother and father would like to give their adult son $28,000.00 and have the gift qualify for the annual gift exclusion. This is doable because the mother could give to the son $14,000.00 and the father could give to the son $14,000.00. Technically, the mother and father would each have to write a separate check to ensure the gift was made properly since $14,000.00 is the maximum amount an individual is permitted to give to a non-spouse individual and have it qualify for the annual gift exclusion.
However, under IRS Code § 2513, spouses are allowed to skip the extra step of writing separate checks and can elect to split the total gift between the two of them. This is called gift splitting. A gift can be made solely from one spouse’s account but still be elected to split between both spouses. Additionally, gift splitting not only applies to gifts qualifying for the annual gift exclusion but can also apply to gifts that qualify for the lifetime gift exclusion. Spouses have to actually elect to split gifts on a gift tax return.
The caveat to gift splitting though is that if a married couple makes a gift splitting election, the election applies then to every gift that is made that year by each spouse. The issue with this is that if one spouse plans (or needs) to make a gift to the other spouse in that same year, they will be unable to do so. Given that the gift splitting election applies to every gift made in a year, the gift from one spouse to the other essentially would mean that the recipient spouse was making a gift to him or herself, which is not permissible.
Additionally, gift splitting might cause a spouse to use some of his or her lifetime gift exemption for individuals that the other spouse selects. For example, in the case of a second marriage, one spouse might want to reserve his or her lifetime gift exemption for his or her children and might not want to waste any of the exemption on anyone else, i.e. stepchildren. But if one spouse makes a gift to the stepchildren, that gift will have to be split between both spouses and could eat into both of their lifetime gift exemptions.
Again, it is important to consult with the proper advisor to determine whether gifts between the spouses will be necessary in a year and to ensure that both spouses will agree to the gift splitting election and that it is done properly.
