GIFT TAX ISSUES FOR SPECIAL NEEDS TRUSTS

The federal gift tax applies to gifts made to special needs trusts as much as to any other gift. Gift tax rules are rather complicated, and you might grasp them more easily if you understand the purpose of imposing the gift tax in the first place. The purpose of imposing a gift tax, it turns out, is to prevent people from evading federal estate tax.

The federal estate tax can be imposed on your probate estate to the extent that its taxable value exceeds the estate tax exclusion that applies during the year you die ($11.4 million for people dying in 2019). Of course, the existence of an estate tax could motivate people to gift property to their heirs during their lifetime simply to avoid estate tax. The gift tax was created to close this loophole.

How the Gift Tax Works

The following principles should provide a general idea of how the gift tax works:

Giving a “gift” means transferring money or property without receiving its full value in return. Giving $5,000 to someone counts as a gift of $5,000, but so is selling a $15,000 car to someone for only $10,000.
Two limits apply — the $15,000 annual gift tax exclusion and the $11.4 million lifetime gift tax exclusion. These figures are current as of 2019, but they will undoubtedly increase in subsequent years to account for inflation.
You can gift anyone (an individual or organization) up to $15,000 in any year without triggering the need to file a gift tax return (IRS Form 709). In other words, you can give up to $15,000 every year to as many individuals and organizations you like without filing a gift tax return. Even filing a return doesn’t necessarily mean you have to pay gift tax, however.
You are allotted a lifetime gift tax exemption that kicks in only in the year you die. Although the 2019 exemption is $11.4 million, it will probably have increased by the year you die.
If you gift more than $15,000 to a single party and are therefore required to file a gift tax return, the amount by which your gifts exceed the $15,000 exemption will be subtracted from your remaining lifetime gift tax exemption.
Certain types of gifts, such as gifts to your US citizen spouse, are unlimited, meaning that you can gift as much as you want without having to file a gift tax return.
If you use up your lifetime gift tax exemption before you die, you will need to pay gift tax on the excess amount for the year in which the gift was made, starting with the year that you exceed your lifetime gift tax exemption. Gift tax rates range from 18 percent to 40 percent.
When you die, the taxable value of your estate will be compared to your remaining lifetime gift tax exemption, if any. Your estate will be taxed on the amount by which the taxable value of your estate exceeds your remaining gift tax exemption (which, after you die, becomes interchangeable with your estate tax exemption).
It is the giver of the gift who pays any gift tax that may be due, not the recipient.