How to Give a Gift

At the risk of endangering the goodwill inherent in gift giving, it may be wise to review the rules of gift giving both under the law of gifts and under the Internal Revenue Code. In order to have a valid gift, three elements must be present: (1) the donor must intend to give a gift, (2) the gift must be delivered and (3) the recipient must accept the gift. Each of these three elements, intent, delivery and acceptance can be accomplished and evidenced in various ways. A gift is made without payment, consideration from the donee (or recipient) to the donor. To the extent that consideration is less than the value of the property, there is an actual gift.

Intent

Intent may be determined by the words used by the donor as one makes the transfer of property. But intent may also be demonstrated based upon the relationship of the parties, the size of the gift in question or how the donor treats the property after the transfer. For example, Dad knows that his Son wants a canoe. Dad buys a canoe, leaves it at his son’s house and makes no effort to care for, register or use the canoe.  This is a gift.

Delivery

While delivery is an essential element, there need not be actual delivery of the gift itself, depending on certain factors. A symbolic delivery, such as handing the keys to a fish house to a recipient, would be considered effective delivery. Delivery also need not always be to the recipient in person, but could be made to someone acting on behalf of the recipient. For example, if John is in Iraq, and John’s grandfather gives a set of car keys and a title completed in John’s name to John’s father, telling John’s father “This is for John”, there is delivery.

However, if the person receiving the gift on behalf of the recipient is under the control or deemed to be under the control of the donor – such as a spouse or an employee – delivery is ineffective and the gift will fail. This meets a common sense test, because we understand that the donor could retrieve the gifted property. Remember the most fundamental rule of gifts: “When it is given away, it is gone.”

Acceptance

A gift must also be accepted by the recipient or their agent. Although this is a requirement for an effective gift, it is commonly assumed to be the case unless facts indicate otherwise. Acceptance may be placed in doubt if the recipient does not acknowledge the gift and fails to place the gift under their control. A gift may also be effective if the transfer is made to an irrevocable trust. The trustee receives the gift and holds legal ownership of the gift, but for the benefit of the recipient.

Gift Tax

Gifts are subject to gift tax unless also subject to an exemption. Fortunately, the exemptions provide significant opportunity to exercise generosity.

Deductibility

Gifts to qualified charities are not subject to the gift tax and may be deductible on the donor’s income tax return. Non-charitable gifts are not deductible on the donor’s tax return, nor is the gift taxable to the recipient of the gift. A mother’s gift to her daughter of $1,000 is not deductible on the mother’s individual income tax return, but it is also not included on the daughter’s individual income tax return.

Lifetime Exemption

Every U.S citizen has a lifetime exemption from gift tax of $1,000,000. Each person can give that amount to any U.S. citizen at any time throughout their lifetime and pay no tax. Gifts in excess of that amount are subject to gift tax at the rate of 45%, but look for Congress to act decisively in 2009 or 2010.