Enrich beneficiaries, and Gift & Estate Planning Concepts: Federal Gift Tax
One of the most overlooked estate planning tools is lifetime giving. A donor who fails to make lifetime gifts misses out on tremendous opportunities to:
Enrich beneficiaries, and
Save taxes.
Prudent donors should take full advantage of the incentives that are available to them to reduce the size of their estates through the use of lifetime gifts.
Until the mid-1930s donors could generally make gifts without any potential tax consequences. But with the Revenue Act of 1932, the federal government imposed a potential gift tax as an adjunct to the federal estate and income taxes. The federal gift tax can be described as the lifetime component of the transfer tax system.
Top Ten Reasons to Make Lifetime Gifts
1. Reduction in the Donor's Estate. A reduction in the size of a donor's estate diminishes the amount of estate taxes due at death.
2. Unique Tax Advantages. Lifetime gifts may be eligible for certain attractive tax options not offered with death transfers, i.e. annual exclusion and gift-splitting.
3. Reduced Cost to Estates Subject to Probate Administration. Reducing the size of an estate through lifetime gifts can reduce probate costs (legal, administration and executor's fees), which tend to vary directly with estate size.
4. Avoid Delays in Probate. Assets given during life avoid the red tape of probate, which can delay distribution to the beneficiaries by months or years.
5. Shift of Future Appreciation to Donee. Donors can shift future appreciation by making lifetime transfers, removing appreciation from the donor's estate and reducing the amount of capital gains tax the donor might have been subject to in the future upon the sale of the asset.
6. Greater Privacy. A donor who leaves property via a will creates a public document subject to inspection by anyone, compared to lifetime gifts in which the donor acts in private.
7. Reduction in Asset Management Responsibility. Elderly and infirm donors, in particular, are relieved of management responsibility associated with the gifted property.
8. Generous Exemption from Tax. An "applicable credit amount" (a.k.a. "unified credit") available to each donor, will effectively exempt the donor's total taxable gifts up to $13,990,000 (indexed for 2025).
9. Shifting Income to Donee in a Lower Tax Bracket. If the gifted property produces income, the donor can shift the future income to individuals in lower tax brackets.
10. Personal Satisfaction. Giving a gift during life allows the donor to witness and enjoy the fruits of generosity.
When Is a Transfer of Property a Gift?
The benefits of lifetime giving and the potential gift taxes imposed do not arise unless the transfer involves a "gift." A gift must be:
The donor must transfer the asset for less than adequate consideration, in money or money's worth, for the transfer to be considered gratuitous. If the owner receives fair market value in exchange for the transfer, a sale has been completed, not a gift. If less than fair market value is received and donative intent exists, then a gift occurs. For example, if the donor pays $300 for a fundraising dinner worth $20, the donor has made a gift of $280.
A donor must make a complete gift, releasing all control over the transferred property. For example, if the donor retains possession of the property or the ability to revoke the gift, then an incomplete transfer occurs resulting in no gift.
The transfer must be voluntary to qualify for a gift. Transfers to discharge a legal obligation, such as by statute or court decree, do not qualify as gifts. For example, if a divorced parent sets up a trust for his minor son to discharge a legal support obligation, the transfer to the trust is not considered a gift.
The transfer must involve property to qualify as a gift. A gift of services, such as legal or accounting services, is not treated as a gift, even though the donee receives economic value.
Although a transfer may qualify as a gift when it is gratuitous, complete, voluntary, and composed of property, the law exempts, or excludes, several transfers from the imposition of federal gift taxes. Among the most applicable and common exemptions:
Payment of tuition by the donor on behalf of any individual (not limited to related beneficiaries), is exempt from taxation, providing the transfer is considered a "qualified transfer." To meet this definition, a payment of tuition must be:
For a full or part-time student
To a "qualified" educational organization with a regular faculty, curriculum, and students in attendance where the educational activities are regularly conducted
Made directly to the organization
Made only for the payment of direct tuition costs, not including books, supplies, housing costs, etc.
Certain Medical Expense Payments
The donor's payment of medical expenses on behalf of another falls under the gift tax exemption if the payment is a "qualified transfer" (again, without regard to the relationship between the donor and donee). The payment for medical expenses must be:
Paid directly to the person or institution who provided the medical services
Limited to costs or expenses for medical services, including diagnosis, care, mitigation treatment, prevention of disease, etc.
Not reimbursed by insurance
Not used to reimburse the patient
Consider this situation: Mary gives a valuable family heirloom to her brother, John. But John has never liked the heirloom and would prefer that a niece have it. So, John refuses to accept the heirloom, and returns it to Mary. Mary follows her brother's wishes and gives the heirloom to the niece.
Does Mary make a gift? If so, to whom? By disclaiming the heirloom, does John make a gift back to Mary or to the niece?
If John observes the formalities for making a "qualified disclaimer," he will not be treated as the donor of the gift to the niece. Instead, Mary will be treated as having made one gift only: to the niece. The original "phantom gift" to John will be wiped off the slate for gift tax purposes.
To remove himself from the gift tax picture, John's disclaimer must be "qualified." This means that he must:
Make the disclaimer in writing
Notify Mary of his refusal to accept the property within nine months after the original "phantom gift"
Not accept any interest in or benefit from the gift property
Not be the ultimate recipient of the disclaimed property
If John fails on any one of these counts, his disclaimer will not be "qualified." Both Mary and John will have made gifts, Mary to John, and then John to the niece, and the IRS will expect both to file gift tax returns on the same property.
A special power of appointment, also known as a limited power of appointment, is the power to appoint property that one does not own to anyone other than oneself, one's creditors, one's estate, or the estate's creditors.
If a power holder can appoint property to any one or all of the four classes above, he or she holds a "general power of appointment" and, for tax purposes, is deemed the owner of property subject to the power. The exercise of a general power of appointment is treated as a gift for gift tax purposes, unlike the exercise of a special power of appointment.
The lapse (expiration unexercised) of a general power of appointment also is treated as a gift to those who succeed to the property by virtue of the lapse. Again, the lapse of a special power is not a gift.
There is a limited exception to the rule that the lapse or exercise of a general power of appointment is a taxable transfer for gift tax purposes. If the amount that could have been appointed prior to the lapse does not exceed the greater of $5,000 or 5% of the value of the funds out of which the exercise of the power of appointment could have been satisfied, no gift results from the lapse.
Click here for an example of a five-and-five power.
Clara is the income beneficiary of a trust whose corpus is currently valued at $80,000. At her death, the trust will terminate and the corpus will be distributed in equal shares to Clara's two children.
Clara has a right to all net income earned by the trust, plus an annual power to withdraw the greater of $5,000 or 5% of the value of the trust corpus. Since $5,000 is greater than 5% of $80,000, Clara could withdraw $5,000 this year by exercising her power.
If she declines to do so, she will not be deemed to have made a $5,000 gift to her children by allowing the power to lapse unexercised. If the trust agreement gave Clara the power to withdraw more than $5,000/ 5% annual "safe harbor" amount, then the lapse of her power in any year would result in a gift to the trust remaindermen.
Certain Interspousal Transfers Incident to a Divorce
Pursuant to their divorce, Mary and Bill enter into a property settlement agreement. According to the settlement, Mary must pay Bill a set amount each year. Is Mary subject to gift taxes based on the property settlement transfers?
Mary will not pay gift taxes on the marital or property settlement if the agreement meets two conditions:
The agreement is entered into pursuant to a divorce, and
The divorce occurs within a three-year period beginning on the date one year before execution of the agreement.
If the agreement meets the two-pronged test, the transaction is considered a transfer for full consideration, rather than a gift.
Waiver of Spousal Pension Rights
A spouse who waives the legal right to survivor benefits under the other spouse's retirement plan does not make a gift by executing the waiver.
All non-exempt transfers of property must be valued to determine the amount subject to gift taxes. The donor, as the party responsible for paying the tax, must report the amount transferred.
A benevolent uncle bestows a car to his favorite nephew on his birthday. The vehicle, purchased for $25,000 several years ago has an appraised value of $20,000 on the date of the gift, and an assessed value for personal property tax purposes of $10,000. How does the donor determine the value of his gift to calculate the federal gift taxes?
Generally, the uncle would use the fair market value of the gift on the date of transfer, fair market value being:
"The price a willing buyer and a willing seller would arrive at after an arm's length bargaining where there is no compulsion to buy or to sell and where both parties are aware of all relevant facts."
In this example, the uncle made a $20,000 gift to his nephew, assuming the appraisal was made by an objective, independent appraiser.
Gifts of certain property use special valuation methods, such as stocks, bonds, annuities, life insurance and real estate.
IRS Tables for Valuation of Partial Interests
A gift involving both present and future interests holds unique valuation considerations. The Internal Revenue Service publishes several valuation tables a donor uses to determine the value of life estates, term of years and remainder interests in gift tax assessments.
No Alternate Valuation Date for the Gift Tax
Unlike the federal estate tax, the gift tax has no alternate valuation date. The value on the date of the gift is always used.
The annual exclusion encourages a repeat of lifetime transfers as a donor can give away tax-free a substantial amount of an estate by making gifts of $19,000 (as indexed for 2025) or less, to as many donees as desired, each year. Such transfers can dramatically reduce the amount of estate and gift taxes levied on the donor's estate.
The annual exclusion allows the donor to exclude from each gift to each separate donee up to $19,000 annually from federal gift taxes for gifts of present interests (see next topic). The donor may use the annual exclusion every year for an unlimited number of donees.
Click here for examples of the use of the annual exclusion.
1. Eva Mae, a wealthy widow, has four children and eight grandchildren. Each year she plans to give $19,000 to each of her 12 descendants. How much could she remove from her estate free of any gift taxes over a five-year period (assuming the annual exclusion remains at the $19,000 amount)? Your answer should be $1,140,000 (12 donees x $19,000/year x five years). The exclusion operates separately from the applicable credit amount (a.k.a. "unified credit"), allowing the donor to take advantage of both.
2. Mary transfers the following gifts this year to: 1) her sister, Amy, in the amount of $19,000, 2) her niece, Sarah, in the amount of $19,000, and 3) her gardener, Peter, in the amount of $19,000. On which transfers and in what amounts can Mary claim the annual exclusions? Does Mary make any taxable gifts this year? Mary can claim the annual exclusion on all three transfers in the amount of $19,000 each, exempting a total of $57,000 in transfers from federal gift taxes. Therefore, Mary has made no taxable gifts and owes nothing in federal gift taxes. (In this example, Mary would not even be required to file a federal gift tax return).
3. Mary makes gifts to the same people next year in the same amounts (assume the annual exclusion amount remains $19,000). Can Mary claim any annual exclusion in the next year? How much federal gift taxes must Mary pay? Because Mary enjoys unlimited use of the annual exclusion, her transfers in the second year are again eligible for the annual exclusion. Mary would not pay gift taxes in the second year. Note: If Mary had made her second round of gifts later in the first year, she would not have been able to use the annual exclusion again. Once used for a particular donee in a particular year, the annual exclusion does not renew until the next calendar year.
4. John transfers property with a fair market value of $21,000 to his father, Paul. May John claim an annual exclusion on the transfer? How much will John pay in federal gift taxes? The transfer qualifies for the annual exclusion in the amount of $19,000. Because the property's fair market value lies above the $19,000 annual exclusion limit, John would make a taxable gift of $2,000.
Available Only for Present-Interest Gifts
To qualify for the annual exclusion, a lifetime transfer must involve a present-interest gift; that is, an unrestricted right to the immediate use, possession or enjoyment of the property. The gift must not be subject to the will of another person or conditioned upon any occurrence.
Click here for examples of the present-interest rule.
1. Lucy forms a trust, giving a life-income interest to her friend Ethel, with a remainder interest to her other friend, Fred. Is Lucy eligible for the annual exclusion on either of the transfers? Lucy made two gifts in forming her trust. First, the gift to Ethel is a gift of a present interest, qualifying for the annual exclusion. The second gift to Fred of a remainder interest fails to qualify for the annual exclusion, as a gift of a future interest.
2. Carol forms a trust to benefit her family. The trustee possesses the discretion to distribute any amount of the trust income to her daughter, Cindy, during Cindy's lifetime, with the remainder to her son, Peter. Has Carol made any gifts eligible to receive the annual exclusion? Neither gift qualifies for the annual exclusion. The gift to Cindy is not an unrestricted right to the immediate enjoyment of the property because of the trustee's discretion over distributions. The gift to Peter is a gift of a future interest, failing to qualify for the annual exclusion.
Prior to the 1950s, a donor wishing to support a minor by setting up a trust in his or her benefit was not eligible to receive the annual exclusion if the trustee had discretion over distributions. The law treated the gift to the minor as a gift of a future interest.
Since then, the Internal Revenue Service implemented a special exception to the future interest rule, allowing a trust benefiting a minor to qualify for the annual exclusion.
Under federal gift tax rules, a 2503(c) trust, or a discretionary trust formed to benefit a minor, will qualify for the annual exclusion upon meeting three requirements:
Both trust corpus and income may be expended by, or for the benefit of, the minor before he or she reaches age 21
Property not expended will pass to the minor when he or she reaches 21 years of age (unless the minor consents to allow the trust to continue)
If the minor dies before reaching age 21, the trust corpus and income will be payable to the estate of the minor or as he or she appoints under a general power of appointment
For a more detailed discussion, see 2503(c) trusts for minors and their uses in estate planning in this section.
Gift-Splitting between Spouses
A married donor receives an extra tax incentive for making a lifetime transfer. The donor and spouse may "split" the gift, treating the transfer as being made one-half by each spouse. A split gift allows the donor and spouse to double the annual exclusion to $38,000 per gift (for 2025), and the gift tax applicable exclusion amount to cover up to $27.98 million (2 x $13,990,000) of total taxable gifts.
Donors must have been married when the lifetime transfer was completed. The consent is then applied to all gifts (except gifts to one another) made by each spouse during the calendar year.
Gift splitting applies only to gifts made to third parties, not gifts between spouses.
Community and Separate Property States
Community property states, or states treating spouses as owning one-half of most marital property, automatically treat a married donor's lifetime transfer as a split gift.
On the other hand, separate property states, or states treating property during marriage as owned by each spouse in his or her own right, require both spouses to consent to making a one-half gift. The spouses elect to "split" the gift by designating their choice on a gift tax return.
Click here for a list of the community property states.
There are nine community property states. In Idaho, Louisiana, Texas, and Wisconsin (which uses the term "marital property"), the income from the separate property of one spouse becomes community property income, and any property acquired with community property income is community property. In Arizona, Nevada, New Mexico, California, and Washington, the income from a spouse's separate property remains separate property. While not community property states, Alaska, South Dakota, and Tennessee all have a form of community property trust that allows couples to opt into community property.
Married couples who elect to split gifts welcome the added advantage of receiving double the applicable credit amount. A married couple who splits a gift can use a total gift tax exemption of $27.98 million against the couple's total gift tax liability.
Let's look at some examples of gift-splitting.
Example 1 - George and Barbara, a married couple, live in a common law state. In 2025, George made the following gifts: $100,000 to their son, George Jr., $100,000 to their friend, Ronald, and $25,000 to their friend, Nancy.
What would be the best advice to give George and Barbara to reduce their gift tax liability?
George and Barbara should elect to split the gifts on their gift tax return by treating the gifts as made one-half by each spouse, as follows:
With Gift Splitting
|
|
George |
Barbara |
|
Gift to George, Jr |
$50,000 |
$50,000 |
|
Gift to Ronald |
$50,000 |
$50,000 |
|
Gift to Nancy |
$12,500 |
$12,500 |
|
Total Gifts |
$112,500 |
$112,500 |
|
Minus Annual Exclusion |
$50,500 |
$50,500 |
|
Taxable Gifts |
$62,000 |
$62,000 |
Each spouse claims $50,500 in annual exclusions, exempting a total of $101,000 from federal gift taxes. In addition, the couple may use the lifetime gift tax credit of both spouses to avoid gift taxes on the $62,000 of taxable gifts by each spouse.
Without Splitting Gifts
|
|
George |
|
Gift to George, Jr |
$100,000 |
|
Gift to Ronald |
$100,000 |
|
Gift to Nancy |
$25,000 |
|
Total Gifts |
$225,000 |
|
Minus Annual Exclusions |
$57,000 |
|
Taxable Gifts |
$168,000 |
In failing to split the transfers, the couple adds $44,000 to the total cost of the taxable gifts, since giving only in George’s name means they cannot offset any of the tax with Barbara's gift tax credit amount.
Example 2 - Tom and Nicole, a married couple, live in a common law state. In 2025, Tom made the following gifts: $100,000 to his wife, Nicole, and $100,000 to their son, Arnold.
Nicole made a gift to her niece Sandra of $100,000.
What would be the best advice to give to Tom and Nicole to reduce their gift tax liability?
Tom and Nicole would make the best planning decision by electing to split the gifts to third parties. The couple would claim the annual exclusions on the gifts to Arnold and Sandra of $38,000 each. Splitting these gifts eliminates $76,000 in transfers from federal gift taxes.
Tom would be unable to split the gift to Nicole, as a gift made to a spouse is not eligible for gift-splitting. However, Tom can claim the marital deduction to shelter fully the gift to Nicole. (The gift tax marital deduction will be discussed shortly.)
With Gift Splitting
|
|
Tom |
Nicole |
|
Gift to Nicole |
$100,000 |
$-0- |
|
Gift to Arnold |
$50,000 |
$50,000 |
|
Gift to Sandra |
$50,000 |
$50,000 |
|
Total Gifts |
$200,000 |
$100,000 |
|
Minus Annual Exclusions |
$57,000 |
$38,000 |
|
Gross Gifts |
$143,000 |
$62,000 |
|
Minus Marital Deduction |
$81,000 |
$-0- |
|
Taxable Gifts |
$62,000 |
$62,000 |
Without Gift-Splitting
|
|
Tom |
Nicole |
|
Gift to Nicole |
$100,000 |
N/A |
|
Gift to Sandra |
$0 |
$100,000 |
|
Gift to Arnold |
$100,000 |
$0 |
|
Total Gifts |
$200,000 |
$100,000 |
|
Minus Annual Exclusions |
$38,000 |
$19,000 |
|
Gross Gifts |
$162,000 |
$81,000 |
|
Minus Marital Deduction |
$81,000 |
$0 |
|
Taxable Gifts |
$81,000 |
$81,000 |
Donors generally may transfer assets to a spouse with an unlimited marital deduction, exempting 100% of the value from taxes. The unlimited deduction is conditioned on the fulfillment of three requirements.
The donor must be married to the donee at the time of making the gift to qualify for the unlimited deduction.
The donee-spouse must be a United States citizen for the donor-spouse to receive the marital deduction for a marital gift. The donor-spouse does not have to be a United States citizen or resident to claim the gift tax marital deduction, so long as the donee-spouse is a United States citizen. If the donee is a non-citizen, the donor may receive a special annual exclusion.
Click here for more information on gifts to donee-spouses who are non-citizens.
A donor who makes a gift to a non-citizen spouse does not receive the marital deduction, but may claim a special annual exclusion of $190,000 (as indexed for 2025). The transfer only qualifies for this exclusion if the transfer would qualify for the marital deduction if the donee-spouse were a United States citizen. In other words, the terminable-interest rule must be met to secure the full $190,000 exclusion. If the United States has a tax treaty with the country of the donee-spouse's citizenship, any treaty provision contrary to the general tax code rules just described will override the tax code rules.
A terminable interest, an interest which may end on the lapse of time or the occurrence or nonoccurrence of an event or contingency, fails to qualify for the marital deduction. For example, the donor might retain an interest allowing him to retrieve the property if the donee-spouse predeceases him or her or if the couple becomes divorced. This would be a gift of a terminable interest ineligible for the marital deduction.
An important exception exists where one spouse contributes more than half the purchase price of property to which the couple takes title as tenants by the entirety or joint tenants with rights of survivorship (both spouses own the property and upon the death of one spouse the property automatically goes to the surviving spouse). The gift from the higher-contributing spouse will still qualify for the marital deduction.
Click here for examples of the gift tax marital deduction.
1. Roy gives Dale, his spouse, a patent with a useful life of ten years, with a reversion to himself, at the end of the ten years. The patent gift will not qualify for the marital deduction because the transfer involves a nondeductible terminable interest. Roy retains the right to the property after Dale's interest is completed. Therefore, Roy will make a taxable gift to his spouse.
2. Bill provides 100% of the purchase price for a residence. Bill and his wife, Hillary take title to the property as joint tenants with rights of survivorship. Bill's gift to Hillary qualifies for the marital deduction even though he will succeed to full ownership if Hillary predeceases him. The transaction falls under an exception to the terminable-interest rule.
The charitable deduction allows a donor to make gift tax-free lifetime transfers to a qualified charity. The amount of the gift tax charitable deduction is unlimited, unlike the income tax charitable deduction where annual limits apply.
The following requirements must be met to secure the gift tax charitable deduction:
Organizations qualifying for the unlimited charitable deduction include:
(1) The United States, any state, political subdivision, or the District of Columbia.
(2) A corporation, trust, community chest, fund, or foundation organized or operated for the following reasons:
Religious
Charitable
Scientific
Literary
Educational purposes
National or international sports competition (although activities cannot provide athletic facilities or equipment)
The encouragement of art
The prevention of the cruelty to animals or children
Note: No 501(c)(3) organization can exist for the purpose of benefiting private individuals or be substantially active in attempting to influence legislation or participate/intervene in any political campaigns and still fall under the definition of a qualified charity.
(3) A fraternal society, order, or association operating under the lodge system (if the transferred property is to be used exclusively for religious, charitable, scientific, literary, or educational purposes including the encouragement of art, and the prevention of cruelty to children or animals).
(4) Any veterans' organization, auxiliary departments, local chapters or posts organized in the United States.
Note: No veterans' organization can operate for the benefit of a private individual or a shareholder to fall under the definition of a qualified charity.
Sometimes, donors bestow gifts to a charitable organization contingent upon the happening of an act or occurrence. Such transfers allow the donor to claim the charitable deduction only if the transfer is visually certain to become effective.
Click here for examples of contingent gifts.
1. Rosie transfers a gift of some vacant land she owns to Central City to be used solely as a public park. May she claim a charitable deduction on the transfer? The gift will not qualify for a charitable deduction if on the date of the gift the city has no plans to use the land as a park, and the possibilities the city will use the land as a park are remote.
2. Rex, a retired physician, decides to give some money to his former employer, University Hospital. The doctor conditions the gift on the hospital's agreement to use the funds only for cancer research. The transfer will not qualify for the deduction unless the hospital agrees to the condition that the money be used solely for cancer research purposes.
Trustees and Discretionary Gifts
Donors should be cautious when setting up trusts leaving the trustees with any discretion in distributing a charitable gift. Awarding a trustee discretion may jeopardize the donor's ability to claim a charitable deduction on the transfer.
Click here for examples of discretionary gifts.
1. Debbie establishes a trust that gives the trustee power to give discretionary sums to her daughter, Carrie, and to her alma mater, State University. Does Debbie make a gift to the university that qualifies for the charitable deduction? Debbie's trust would not qualify for the charitable deduction because any gift to the university would be considered "uncertain."
2. Debbie establishes a trust that requires the trustee to distribute all income annually. However, the trustee has the authority to give discretionary sums of money to: 1) her daughter, Carrie, 2) the university, and 3) the local animal shelter. The trust will not qualify for the charitable deduction because one or more of the gifts is not made to a qualified charitable organization. Moreover, the trustee could distribute all of the income to Carrie. Lesson learned from the examples: Make the charitable gift a definitive gift whose amount is clearly ascertainable.
Partial or Split-Interest Gifts
Ruth, a wealthy retiree, recently became distressed on hearing two pieces of news. First, her niece, Sarah, lost her job and needs financial assistance to raise her children. Secondly, her favorite museum caught fire, causing several thousands of dollars in damages. Ruth wishes to help both her niece and the museum.
What is the best way for Ruth to accomplish both her goals?
Ruth wants to make a split-interest gift, or a gift consisting of both a charitable and noncharitable transfer. A split-interest gift consists of the donor keeping an interest for him or herself or giving an interest to another individual, while also transferring an interest to a qualified charitable organization.
To qualify for the gift tax charitable deduction (and, for that matter, the income tax and estate tax charitable deductions), a split-interest gift generally must be in the form of a charitable remainder trust or a pooled-income fund. There are a few exceptions, however, under which a partial interest gift may be made outright and still qualify for the charitable deduction.
Split-interest gifts can qualify for the charitable deduction if the outright transfer falls into one of the following categories:
Undivided Portion of Donor's Entire Interest
A donor may transfer outright an undivided portion of the donor's entire interest in property to a qualified charitable organization. To qualify, the interest may not pass by trust, and must extend over the entire period of the donor's interest in the property.
Example: Jerry owns a piece of real estate. He partitions, or divides, the real estate giving a one-third interest to the local university.
Remainder Interest in Personal Residence or Farm
A donor may give a remainder interest in his or her personal residence or farm (including a ranch) to a charitable organization, if the interest is not transferred via trust. The donor must transfer an interest in the actual property, not the proceeds flowing from the sale.
Example: Tom owns a life estate on his family farm, with a remainder interest to his church. The life estate interest allows him to occupy the farm for his lifetime. At Tom's death, the farm will transfer to the church.
Qualified Conservation Contributions
A partial interest in real property may be given outright for certain conservation purposes and secure the gift tax charitable deduction. Acceptable conservation purposes include:
Preserving land for outdoor recreation
Protecting wildlife
Maintaining open spaces
Safe-guarding historically important land areas or a certified historic structure
Charitable Remainder Trusts & Pooled Income Funds
Charitable remainder trusts and pooled income funds are defined the same for federal gift tax purposes as for federal income and estate tax purposes. The present value of the charity's remainder interest in the trust or funds, as determined using IRS tables and interest rates, is eligible for the gift tax charitable deduction.
For more information, see the Qualification Requirements in Charitable Remainder Trusts.
The donor begins the tax computation process by valuing any gifts made in the current year that did not qualify as exempt gifts (e.g., as qualified tuition payments). From the value of each gift, the donor deducts any amount allowable for:
Gift-splitting with the donor's spouse
The $19,000 annual exclusion (indexed for 2025)
The gift tax marital deduction
The gift tax charitable deduction
The net result will be the taxable gift(s) made during the current year.
The graduated gift tax rates begin at 18%, but the applicable credit amount (unified credit) enjoyed by all donors effectively exempts cumulative taxable gifts until they exceed $13.99 million (as indexed for 2025). The top marginal tax rate is 40% on total taxable gifts.
The federal gift tax is cumulative. More recent taxable gifts are "stacked" on top of prior taxable gifts when the graduated tax rates are applied. A possible result is that later taxable gifts likely will be taxed in higher tax brackets as the cumulative gift total climbs.
Click here to see the 2025 gift tax rate schedule.
The gift tax applicable credit is part of the unified credit amount which exempts up to $13.99 million (as indexed for 2025) in taxable gifts from federal gift taxes (and applies to estate transfers as well).
Click here to see the applicable credit amount.
Computation Example with Worksheets
Calculating gift taxes can be tricky due to the cumulative nature of the tax. In computing the tax, the donor actually makes two computations. Tax computation #1 is on a tax base of all taxable gifts made, including the current year’s taxable gifts. Tax computation #2 is on a tax base of all taxable gifts, but excluding those taxable gifts made in the current year. Then tax #2 is subtracted from tax #1 to compute the tax liability on the current year’s taxable gifts.
When we arrive at the discussion of the federal estate tax, we’ll see that all taxable gifts (made after December 31, 1976) are "unified" with the taxable transfer made at death (the taxable estate) in computing the estate tax. For purposes of computing the gift tax, however, all taxable gifts made by the donor are cumulated into the tax computation bases for tax #1 and tax #2.
Example - George made a gift of $900,000 to Jane (his niece) in 2008. In 2025, George made a $15,500,000 gift to John (his son). How much will George incur in gift taxes on the transfer to John?
|
Value of Gift to John |
$15,500,000 |
|
Less: 2025 annual exclusion |
$19,000 |
|
Less: deductions |
$-0- |
|
Taxable Gift |
$15,481,000 |
|
Add: prior taxable gifts |
|
|
Total taxable gifts |
$16,369,000 |
|
Tentative tax #1 ($345,800 + 40% of the excess over $1,000,000) |
|
|
Less: tentative tax #2 |
|
|
Tax #1 minus tax #2 |
$6,191,280 |
|
Less: applicable credit amount (2025) ($6,191,280 - $5,541,800) |
$649,480 |
|
Plus: credit previously used (in 2008) |
$888,000 |
|
Federal Gift Tax Liability |
$1,537,480 |
Click here to print out a worksheet that can be used to compute the federal gift tax.
Return Filing Requirements for Charitable Gifts
If a donor transfers his or her entire interest in property to charity, a federal gift tax return does not have to be filed regardless of the size of the gift. Split-interest charitable gifts are subject to the usual gift tax return filing rules (to be covered shortly).
After determining the gift tax due, a donor must file a Form 709 gift tax return with the Internal Revenue Service. The federal government requires a donor to file a gift tax return listing all taxable gifts made during the year, with four exceptions. Donors are not required to file a gift tax return if: 1) the gift does not exceed the annual exclusion amount, 2) the transfer only involves a gift to a spouse qualifying for the marital deduction (unless a QTIP election must be made), 3) a qualified transfer for educational or medical costs, and 4) most charitable transfers.
Donors filing a return must do so by April 15th of the year following the calendar year the gift was made. For example, Paul makes a gift to his son, Peter, on March 20, 2025. Paul must then file a gift tax return by April 15, 2026, for the gift to Peter.
The Internal Revenue Service may grant an extension to donors needing more time to complete their returns or pay their gift taxes. Upon application, a donor may receive an extension of up to six months from the original due date. Donors may be interested in delaying payment of the gift tax, but the federal government will impose interest on all unpaid gift taxes starting from the original tax due date.
The Internal Revenue Service may impose penalties on the donor for several reasons, including:
Willfully or fraudulently failing to file a gift return
Willfully or fraudulently attempting to evade the gift tax
Gross underpayment of gift taxes due to negligence or disregard of rules and regulations
Understatement of the value of property on a return
In addition to financial penalties, criminal punishments may be imposed in certain cases.
Only one state, Connecticut, levies a stand alone gift tax in addition to the federal gift tax. Generally, the Connecticut gift tax structure mirrors the federal gift tax system. However, state gift tax payments do not give rise to a tax credit that can be used to reduce the donor's federal gift tax liability.
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