When you offer someone assets without obtaining anything in return, this is known as an inter vivos gift. You must give them this property while they are alive for it to be called an inter vivos gift. It is considered a testamentary or post-mortem transfer if you give them this property after you die. Let’s go over an example and what you need to know about inter vivos gift tax. If you intend to give money or property inter vivos gift to another individual, a financial advisor can assist you in determining your potential tax burden.
What Is Inter Vivos Gift?
An inter vivos gift, which translates to “gift between the living” in Latin, is a legal word referring to a transfer or gift done during the grantor’s lifetime. Inter vivos gift, which includes estate-related property, is not subject to probate tax because they do not form part of the donor’s estate at death. A transfer executed during the grantor’s lifetime is known as an inter vivos transfer.
Gifts of more than $15,000 per year to anyone other than a spouse or a qualifying charity are subject to gift taxes. The true worth of the gifted property is determined at the time of transfer. The individual receiving the inter vivos gift is not required to disclose the gift to the IRS or pay income tax on it. However, if the gift exceeds the $15,000 threshold, the giver must pay gift taxes on it.
How Inter Vivos Gift Work
For various reasons, a gift inter vivos is an effective estate planning approach. In addition to avoiding probate taxes, if donated as a donation to a charity foundation, the donor can claim the value of the gift as a tax credit on their tax return.
Furthermore, unlike gifts bequeathed through a will or a trust, many people donate inter vivos gifts simply because they want to monitor the gift during their lifetime. Many people value the ability to distribute the property in the manner planned. There are also limited reporting requirements, allowing a grantor’s property and dealings to remain private.
Gifts of more than $15,000 may be liable to gift tax if they are not made to a charity.
Types of Inter Vivos Gifts
Inter vivos gifts can be almost anything – cash, financial accounts, real estate, or even joint tenancy in a property. Because of the great value of the real estate, the gift of joint tenancy is a particularly effective option. Joint tenancy is only possible during one’s lifetime and is never a testamentary gift. People frequently associate joint tenancy with partners who share a home; nevertheless, joint tenancy can be utilized to construct a type of succession arrangement with the testator’s beneficiaries.
When people transfer to shared tenancy, a common issue is that their intentions for the property are not made plain enough. There is a presumption that a transfer in joint tenancy is made with the intent to be held in trust rather than with the intent to gift – the presumption of resulting trust. In some circumstances, it is uncertain if the testator meant for the co-owner to inherit the property when they died. It is critical to be quite clear about your intentions for the asset while making joint tenancy gifts, as well as any gifts in general. It’s often a good idea to document your intentions should there be a dispute over your estate after your death.
Inter Vivos Gifts: How to Make Them
The following conditions must be completed for an inter vivos gift to be lawful and legally recognized:
- The Donor’s Capacity – When gifting a property, the donor must be at least 18 years old and have legal capacity.
- Total Control – The donor should relinquish all interest and control over the property to be transferred.
- The Donor’s Specific Desire — The donor’s specific intent to make the gift must be specified in writing. In addition, the donor should complete an irrevocable and present transfer of the property’s right of ownership or title so that the gift is effective immediately. Furthermore, the donor should not intend or plan for the gift to be passed on after his or her death.
- The Gift’s Delivery – When physically giving the item is impracticable or impossible, the gift might be delivered metaphorically or constructively.
- Acceptance of the Gift – Because the gift has value, the law naturally anticipates that it will be received. It is, however, recommended that the recipient of the gift accept the gift in writing for proper documentation.
Giving an inter vivos gift may be good asset protection and estate planning option for you if you want to avoid tax and have influence over the distribution of your estate while you’re still alive. However, because such gifts are not irrevocable, you must ensure that you satisfy all of the above criteria for the gifts to be declared valid. Having said that, a local estate planning attorney should inform you of your rights and obligations. They’ll make sure you take the appropriate measures to secure the validity of your inter vivos gift.
An Inter Vivos Gift Example
Joyce wishes for her grandson, Roy, to be reunited with his family. Roy recently married and is expecting a child. Joyce is considering relocating to her second house in Florida to avoid the harsh winters. Joyce has recently retired and is in good health, and she knows Roy could use the land, or the proceeds from its sale, to help support his growing family right away. Rather than making Roy wait until she dies to acquire her property, she makes Roy an inter vivos gift of the house. So afterward, he has full ownership and may do whatever he wants with it. Joyce’s home will not pass through probate or be liable to the estate tax because she will no longer own it at the time of her death.
Why Should You Use Inter Vivos Gifts?
Because they are not taxable, inter vivos gifts are frequently employed in asset protection and estate planning. The donor, on the other hand, should be aware that an inter vivos gift is irrevocable. If the donor attempts to benefit from or assert control over the gift, its tax-exempt status will be revoked. Thus, it compromises the transfer’s legal standing and making it taxable.
The Benefit of Using Inter Vivos Gifts
Many people choose to use inter vivos gifts because they allow the giver to see exactly what will happen to the gift while he or she is still alive. Instead of putting gifts in a trust or will, this type of structure allows the donor to oversee the estate distribution process. Many people choose this arrangement because it gives them complete control over the disposal of their estate. Furthermore, by using inter vivos gifts, you can keep your financial activities and assets private because such gifts have fewer reporting requirements than those under a trust or bequest.
Testamentary vs. Inter Vivos Gift
One of the two types of unilateral property transfers is inter vivos gifts. The second type of transfer is known as testamentary, or post-mortem, and occurs after someone dies. Wills and probate are the most typical types of testamentary transfers. It should be noted, however, that this is a form of legal jargon. When someone dies, their estate is made up of all of their assets, and all estates must go through the probate procedure.
When attorneys talk about transfer through probate, they usually mean when someone dies without a will. In this scenario, the probate court distributes the estate’s assets in accordance with inheritance law.
The crucial distinction between an inter vivos gift and a testamentary transfer is when the assets are transferred. It is an inter vivos gift if someone receives the property while you are still alive. It is a testamentary transfer if someone receives the property after you die. So, it makes no difference when you authorize the transfer. It’s only when the transfer occurs that it matters.
On rare occasions, this can become complex if someone intended for a gift to take place during their lifetime but died before the transaction could be consummated. However, in general, if the gift was intended to be fully transferred during the giver’s lifetime, it is termed inter vivos.
Inter vivos gifts are frequently confused with probate and estate concerns because they both involve property law. As a result, some articles will mention gifts as a method of avoiding estate taxes. It is true that by making a gift to someone during their lifetime, you can avoid some potential tax complications after their death. However, it is critical not to overestimate this link. Gifts and probate are distinct legal concepts with distinct legal implications.
Tax and Inter Vivos Gift
While gifts touch on a variety of legal issues, they most frequently generate tax concerns. The gift tax is a tax levied on unintended property transfers. It can range between 18% and 40% of the asset’s value. Because the IRS allows for such large exclusions, it is extremely rare for someone to owe taxes on gifts. Instead, this tax primarily serves to discourage people from dodging other forms of taxation. People may restructure transactions as intricate gifts if they could give gifts tax-free. The gift tax was enacted to close this loophole.
Exclusions for gifts are classified into two categories. The first of these is the annual exclusion. This is the maximum amount you can give someone each year without having to report it to the IRS. The second type of exclusion is lifetime exclusion. This is the total amount you can give someone during their lifetime, in addition to the annual exclusion, without having to pay any taxes.
Both exclusions are per-recipient. This means you can gift the maximum amount to as many people as you choose, including both spouses of a married couple. To keep up with inflation, the IRS raises the exclusions each year.
If you give someone a gift each year, it counts towards your annual exclusion. If you offer someone more than their annual exclusion amount, it is deducted from their lifetime exclusion. Also, if you give someone more than their yearly exclusion amount in a given year and have given them more than their lifetime exclusion amount in total, you will owe taxes on the difference.
In 2022, the lifetime gift tax exemption is $12,060,000, with a $16,000 yearly exclusion. This means that you can donate someone more than $12 million (or property worth $12 million) throughout the course of their life without having to pay taxes on those transfers. In addition to the $12 million, you can donate someone up to $16,000 every year without even notifying the IRS.
When a gift is big enough to trigger the gift tax, the individual making the inter vivos gift is responsible for paying the tax.
Finally, the IRS views gifts in a slightly different light than traditional property law. Any exchange of assets is a contract in the context of the property. When you give property or money without expecting to get something of at least equal value in return, you make a tax-deductible gift.
Keeping this in mind, selling something for less than its full value or offering an interest-free or low-interest loan could be considered a gift. So, for example, if you sell your house for $100, it may be deemed a property contract. However, from the IRS‘s perspective, it would qualify as a gift because you gave the house far less than its full value.
The goal here, as with the gift tax in general, is to keep people from gaming the system.
Any unilateral transfer of property that occurs while you are alive is considered an inter vivos gift. This means you offer someone a gift with the intention of them receiving it while you are still alive. It is one of two types of unilateral transfers, the other being testamentary transfers, which take place after your death.