Gift Tax Between Family Members

Many donors ask if they can gift money to their children without paying tax, and the answer generally resides in the strategic use of the annual exclusion. This allows a donor to give up to 19,000 dollars to an unlimited number of recipients each year without depleting their lifetime unified credit or incurring an immediate tax bill. For a gift to qualify for this exclusion, it must be a gift of a present interest, meaning the child or relative must have the immediate right to use and enjoy the property. We assist our clients in structuring these annual transfers to ensure that every dollar qualifies for the exclusion, effectively moving substantial wealth out of the taxable estate over several years through a disciplined and legally compliant program.

A frequent point of confusion for donors is whether they need to file Form 709 if no tax is actually due because of the historically high lifetime exemption. The law is clear that a federal gift tax return is required whenever a gift to an individual exceeds the 19,000 dollar annual threshold, even if the donor utilizes their unified credit to offset the tax liability. Filing this return is a critical protective measure because it triggers the statute of limitations, preventing the government from revaluing the gift decades later during a post-mortem estate audit. We manage the entire filing process for our clients, ensuring that every gift is disclosed with the level of detail required to provide finality and to protect the estate from the administrative chaos and financial penalties that arise from unreported transfers.

For gifts involving assets that do not have a ready market price, such as private company shares or undeveloped land, a qualified appraisal is a mandatory legal requirement under the adequate disclosure rules. The government utilizes its own specialized valuation teams to review these transfers, looking for instances where donors have used assumptions that artificially lower the reported value of the asset. 

We coordinate with elite independent appraisers who specialize in complex valuations, ensuring that your gift is supported by a contemporaneous documentation package that addresses market trends, comparable sales and the specific physical or financial characteristics of the property. This proactive approach creates a substantive evidentiary record that discourages auditors from pursuing a valuation challenge or attempting to recharacterize the nature of the gift.

One of the most effective planning tools in intra-family gifting is the application of valuation discounts for minority interests in family-owned entities. If a donor transfers a twenty percent interest in a family limited liability company, that interest is worth less than a pro-rata share of the total assets because the recipient cannot control the entity and there is no public market for the shares. 

The law recognizes these lack of control and lack of marketability discounts, which can often reduce the taxable value of a gift by thirty percent or more. We structure these transfers to justify the highest legally defensible discounts, allowing you to move more wealth to the next generation while utilizing less of your lifetime exemption.

The interest rate for an intra-family loan must meet or exceed the Applicable Federal Rate (AFR) published monthly by the Department of the Treasury. There are different rates for short-term, mid-term and long-term loans, and failing to use the correct rate can result in the IRS imputing interest income to the lender and a taxable gift to the borrower. We assist our clients in selecting the appropriate AFR and drafting promissory notes that satisfy the most rigorous federal scrutiny. 

This ensures that the loan is respected as a separate legal transaction and that the family can leverage the low-interest-rate environment to move wealth to the next generation without incurring a gift tax liability.

A significant risk in intra-family lending is the failure of the borrower to make regular payments or the lender's decision to forgive the debt without proper documentation. If the IRS determines that the lender never intended to collect the debt, they may recharacterize the entire loan as a gift made on the date the funds were originally transferred. Similarly, if the lender forgives a portion of the debt each year, that forgiveness constitutes a gift that must be measured against the 19,000 dollar annual exclusion. We manage the administrative requirements of these loans, including the tracking of payments and the formal documentation of any debt forgiveness, to ensure that the family's financial goals are achieved within the bounds of the law.

When a parent provides a down payment for a child's home, the transfer is considered a gift and must be documented accordingly to satisfy both the tax authorities and the mortgage lender. If the amount exceeds 19,000 dollars, or 38,000 dollars for a married couple utilizing gift splitting, a gift tax return must be filed. We advise our clients on the best methods for providing this assistance, which may include a combination of direct gifts and intra-family loans to stay within the annual exclusion limits. By planning these transfers in advance, we help families provide for the next generation while maintaining a compliant and defensible tax record that withstands IRS examination.

The Internal Revenue Code provides a powerful exception for the direct payment of a family member's medical or educational expenses. These payments do not count toward the annual exclusion or the lifetime exemption, provided they are made directly to the hospital, doctor or educational institution. This allows a grandparent, for example, to pay for a grandchild's entire university tuition or a major medical procedure without any gift tax consequences regardless of the total amount. We assist our clients in coordinating these direct payments and maintaining the necessary receipts and documentation to prove that the transfers qualify for this specialized exclusion. This strategy is an excellent way to provide significant support while preserving your unified credit for other large asset transfers.

A common challenge in intra-family gifting is making a gift to a trust qualify for the annual exclusion, which normally requires a present interest. This is achieved through the use of Crummey powers, which grant the trust beneficiaries a temporary right to withdraw the contributed funds, thereby transforming a future interest into a present interest for tax purposes. This strategy is frequently used in irrevocable life insurance trusts to fund premium payments without depleting the donor's lifetime exemption. We manage the administrative requirements of these trusts, including the drafting of withdrawal notices and the coordination of notice periods, to ensure that the government cannot disqualify the annual exclusions.

A Grantor Retained Annuity Trust (GRAT) is a specialized estate planning tool that allows a donor to transfer assets to heirs with little or no gift tax cost. The donor transfers assets to the trust and receives an annuity payment for a term of years, and any appreciation in the value of the assets beyond the government's assumed interest rate passes to the beneficiaries tax-free. This is an ideal strategy for assets that are expected to grow significantly in value, such as pre-IPO stock or commercial real estate. 

We specialize in the design and implementation of these instruments, tailoring each trust to the specific financial needs and family dynamics of our clients. Our approach ensures that your wealth remains in your family's control while satisfying the most rigorous federal standards.

• Implementation of spousal lifetime access trusts to provide financial flexibility while gifting assets.
• Utilization of charitable lead trusts to provide for a cause while transferring the remainder to heirs tax-free.
• Analysis of the generation-skipping transfer tax impact on gifts to grandchildren and remote descendants.
• Coordination with corporate fiduciaries to manage trust assets according to the grantor's specific intent.