Gift splitting can be a valuable estate planning tool, allowing you and your spouse to maximize the amount of wealth you can transfer tax-free. In some cases, though, it can have undesirable consequences, so be sure that you understand the implications before making an election to split gifts.
Gifts of separate property
Gift splitting is helpful if you wish to minimize taxes on gifts of separate property (as opposed to jointly owned or marital property). Suppose, for example, that in 2022 you give your child $32,000 in stock that’s your separate property. Your annual gift tax exclusion for 2022 shields half of that amount from gift taxes, but the remaining $16,000 is taxable. However, if you and your spouse elect to split gifts, half of the gift is deemed to be from your spouse and is shielded from tax by his or her 2022 exclusion.
It’s important to understand that when you make an election to split gifts on a gift tax return, it applies to all gifts made by you or your spouse during the year. In some cases, this can have unintended consequences, especially if you plan to leverage your federal gift and estate tax exemption amount, which is $12.06 million in 2022.
Because the exemption is scheduled to return to an inflation-adjusted $5 million in 2026, many people are making large gifts to their loved ones before the current exemption sunsets. But if you elect to split gifts, you risk losing the benefit of the increased exemption.
For example, let’s say that in 2022 you transfer interests in your separately owned business valued at $12.06 million to your children. If you and your spouse elect to split gifts this year, then each of you will be deemed to have made a gift of $6.03 million. Now let’s say that when the exemption amount drops in 2026, the inflation-adjusted amount ends up being $6.03 million. This means that you and your spouse will both have used up your exemptions. Had you not split gifts in 2022, however, you would have enjoyed your full $12.06 million exemption amount, while preserving your spouse’s $6.03 million exemption.
Follow the rules
It’s important to understand the rules surrounding gift-splitting to avoid unintended — and potentially costly — consequences.