Practical advice on taking advantage of the annual estate tax gift exemption?

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alexcr
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Practical advice on taking advantage of the annual estate tax gift exemption?

Post by alexcr »

My wife and I have reached a point with our savings and ages where, for estate tax planning purposes, it makes sense for us to take advantage of the annual exemption, and gift each of our two sons $30,000 this year and going forward.

I'd love any practical advice on how to go about doing this.

For example, is it as simple as us cutting a $30,000 check to each of our sons? Or is it important to separate the payments so that $15,000 can be tied to me and $15,000 can be tied to my wife? (Both of us share the same checking account, though.)

Are there tax filings that needs to be made? Which ones? Do they need to be filed right away or with our annual tax return? I think I recall reading something about this.

Thanks in advance for any practical advice folks can offer!
marcopolo
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by marcopolo »

If it is coming from a joint checking account, a single check is fine. Nothing needs to filed. The filing requirement is only if you exceed the annual exemption amount.
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Retired Bill
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by Retired Bill »

Not a lawyer and not familiar with the different states laws regarding joint accounts.

1. The gift needs to be a present interest to qualify for annual gift exclusion. A check or cash is a present interest.
2. The gift must be completed before end of year. For a check this means the check needs to clear your bank account on or before December 31 of the year the gift is intended for. I've seen a number of Christmas "gift" checks not clearing the parents account in time, so ends up counting next years annual gift exclusion.
3. Birthday and Christmas gifts also count towards the annual gift exclusion. So those shirts you give to the sons, or some cash in a card, or a gift card needs to be included in the annual exclusion amount. If cash and these other gifts over $15,000, you are over the annual exclusion amount and a Form 709 will be required.
4. Medical and tuition if paid directly to the medical provider or school in behalf of the donee are not counted against the annual gift exclusion.
5. Avoid a single check combining your gifts as it complicates things. You would have to file a Form 709 and elect gift splitting on the return or the gift would be considered as made by just one of you.
6. Although I believe you will be ok as long as each spouse prepares and signs the checks to each of the sons, it would be more bullet proof if the checks were from separately owned accounts. If you write a personal letter or note with the gift checks keep a copy to further support who is making the gift.
7. If you sons are married, you could also make gifts to spouses to transfer more wealth. Some families do this, and some will never do this.
fourwheelcycle
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by fourwheelcycle »

marcopolo wrote: Mon Nov 22, 2021 10:24 pm If it is coming from a joint checking account, a single check is fine. Nothing needs to filed. The filing requirement is only if you exceed the annual exemption amount.
We follow marco's pattern. Each January we move funds from our Vanguard joint account settlement fund to our children's Vanguard settlement funds. We move less than $30K per person to leave room for smaller gift checks at Christmas, birthdays, and wedding anniversaries. My wife has asked why we can't give $30K in January and still give the other smaller checks - I respond by asking if she wants to fill out the required extra 709 forms each year, and keep track of each filed form so she can carefully sum up the net gift amounts and report them on every future 709 form - for the rest of our lives.

If we rent a beachfront condo and our children come to visit, or if we visit them and pay for order-in pizza, those expenses are "for our benefit" and we do not report them.
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JoeRetire
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by JoeRetire »

alexcr wrote: Mon Nov 22, 2021 10:19 pm My wife and I have reached a point with our savings and ages where, for estate tax planning purposes, it makes sense for us to take advantage of the annual exemption, and gift each of our two sons $30,000 this year and going forward.

I'd love any practical advice on how to go about doing this.

For example, is it as simple as us cutting a $30,000 check to each of our sons?
Yes, assuming it's a joint checking account.
Are there tax filings that needs to be made?
No.
Thanks in advance for any practical advice folks can offer!
If your sons have spouses, you could gift $30k/year to them as well.
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cas
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by cas »

alexcr wrote: Mon Nov 22, 2021 10:19 pm For example, is it as simple as us cutting a $30,000 check to each of our sons? Or is it important to separate the payments so that $15,000 can be tied to me and $15,000 can be tied to my wife? (Both of us share the same checking account, though.)
marcopolo wrote: Mon Nov 22, 2021 10:24 pm If it is coming from a joint checking account, a single check is fine. Nothing needs to filed. The filing requirement is only if you exceed the annual exemption amount.
Retired Bill wrote: Mon Nov 22, 2021 11:17 pm 5. Avoid a single check combining your gifts as it complicates things. You would have to file a Form 709 and elect gift splitting on the return or the gift would be considered as made by just one of you.
6. Although I believe you will be ok as long as each spouse prepares and signs the checks to each of the sons, it would be more bullet proof if the checks were from separately owned accounts. If you write a personal letter or note with the gift checks keep a copy to further support who is making the gift.
If I recall correctly, there is a confusing description + example involving gifts from a joint checking account in the instructions for Form 709.

Due to the confusing nature of the example, there have been boglehead's forum discussions where some people point to it and say "See, writing a check from a joint checking account is fine and doesn't require filing Form 709 to report gift splitting as long as it is under 2 x individual gift annual gift exemption."

And other people look at the exact same wording and say "See, this proves you have to report gift splitting on a Form 709 if you write a check from a joint checking account."

(I am not a lawyer or relevant professional, and I don't know the answer.)

Here is a relevant discussion from the boglehead's forum: viewtopic.php?p=1600139#p1600139
(Make sure to keep reading after the initial post I linked to.)

There may well be more discussions of this sort of you do a forum search on something like "joint checking form 709 gift splitting".
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HueyLD
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by HueyLD »

alexcr wrote: Mon Nov 22, 2021 10:19 pm My wife and I have reached a point with our savings and ages where, for estate tax planning purposes, it makes sense for us to take advantage of the annual exemption, and gift each of our two sons $30,000 this year and going forward.

I'd love any practical advice on how to go about doing this.

For example, is it as simple as us cutting a $30,000 check to each of our sons? Or is it important to separate the payments so that $15,000 can be tied to me and $15,000 can be tied to my wife? (Both of us share the same checking account, though.)

Are there tax filings that needs to be made? Which ones? Do they need to be filed right away or with our annual tax return? I think I recall reading something about this.

Thanks in advance for any practical advice folks can offer!
First question: Do you live in a community property state?

If yes, did the gift come out of community property?

If a gift is of community property, it is considered made one-half by each. No spousal consent is required.

You need to read instructions for Form 709.
billfromct
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by billfromct »

And I’ve seen that the 2022 individual Federal gift maximum, without filing with the IRS, moves from $15,000 to $16,000 in 2022.

bill
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alexcr
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by alexcr »

HueyLD wrote: Tue Nov 23, 2021 8:57 am First question: Do you live in a community property state?

If yes, did the gift come out of community property?

If a gift is of community property, it is considered made one-half by each. No spousal consent is required.
The gift comes from our joint banking account. Based on other responses, it sounds like that makes it community property.

However, I live in Florida, which is not a community property state. Does that change things?
Joey Jo Jo Jr
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by Joey Jo Jo Jr »

A joint account in and of itself does not make the money community property, and Florida is not a community property state.

I think most (all?) non-community property states will treat joint account funds, even when married, as owned by the person who contributed the funds. Therefore, I think a check from one owner/spouse for $30k would require a 709 with gift splitting to stay within the annual exclusion (assuming no other gifts for the year to the donee).

In contrast, a $15k check from each spouse (assuming no other gifts for the year to the donee) SHOULD work, provided that each spouse can prove ownership of that amount at the time of the gift. However, because proving that may be impossible after donors have died (in and estate tax audit), the only way to be 100% sure is to use separate gifts from separate accounts or to file the 709.
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alexcr
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by alexcr »

Joey Jo Jo Jr wrote: Wed Nov 24, 2021 4:13 am A joint account in and of itself does not make the money community property, and Florida is not a community property state.

I think most (all?) non-community property states will treat joint account funds, even when married, as owned by the person who contributed the funds. Therefore, I think a check from one owner/spouse for $30k would require a 709 with gift splitting to stay within the annual exclusion (assuming no other gifts for the year to the donee).

In contrast, a $15k check from each spouse (assuming no other gifts for the year to the donee) SHOULD work, provided that each spouse can prove ownership of that amount at the time of the gift. However, because proving that may be impossible after donors have died (in and estate tax audit), the only way to be 100% sure is to use separate gifts from separate accounts or to file the 709.
So this means that every American married couple, besides those living in the nine community property states, should be filing a 709 for the situation described, even if the funds are coming from a joint bank account?

I believe you, but this is surprising given all the people in this thread who don't seem to feel this is necessary. Unless all the folks who have been responding live in California, Texas, etc.?
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by TomatoTomahto »

alexcr wrote: Wed Nov 24, 2021 6:25 am I believe you, but this is surprising given all the people in this thread who don't seem to feel this is necessary. Unless all the folks who have been responding live in California, Texas, etc.?
Our attorney files a Form 709 for us annually even though we stay under the limit.

Clarification; it might be because we have a Crummey Trust where one of us is Grantor and the other is Trustee.

ETA: we do not live in a community property state.
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HueyLD
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by HueyLD »

alexcr wrote: Wed Nov 24, 2021 6:25 am So this means that every American married couple, besides those living in the nine community property states, should be filing a 709 for the situation described, even if the funds are coming from a joint bank account?

I believe you, but this is surprising given all the people in this thread who don't seem to feel this is necessary. Unless all the folks who have been responding live in California, Texas, etc.?
My recommendation is that you want to write two checks at $15k (or $16k in 2022j each with your signature on one check and your spouse’s signature on the other check. This is to make it very clear that each person gifts only $15k ($16k in 2022).

The above process is out of an abundance of caution and I believe a good practice. I guess if you absolutely enjoy having a chance of filing form 709, then you may ignore my recommendation.

Good luck to you. Your children are very fortunate to have you as a parent.
dukeblue219
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by dukeblue219 »

Look, set your IRS risk tolerance as you see fit but there is no legion of gift police scouring bank records looking for checks that didn't clear until January 1 or $30k checks from a joint account.

My own plan would be to write a single check and be done with it.
Running Bum
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by Running Bum »

If your sons have low enough income that capital gains wouldn't be taxed, you could grant stock or mutual fund shares with unrealized capital gains. They could see tax free and you've unloaded some possible tax liabilities. They don't get stepped up basis on a gift so it's not a good idea if they would pay cap gains. You might as well see if you can leave it to them in your estate where they would get stepped up basis.
Joey Jo Jo Jr
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by Joey Jo Jo Jr »

alexcr wrote: Wed Nov 24, 2021 6:25 am
So this means that every American married couple, besides those living in the nine community property states, should be filing a 709 for the situation described, even if the funds are coming from a joint bank account?

I believe you, but this is surprising given all the people in this thread who don't seem to feel this is necessary. Unless all the folks who have been responding live in California, Texas, etc.?
Well, it’s one thing to say the IRS isn’t worried about a particular issue (which I can’t comment on myself) versus what the actual law provides. There have been tons of people over the years who are completely oblivious to 709s altogether and gift their kids real estate without filing one. I believe the IRS at one time said they were going to start systematically reviewing deeds, but I don’t know if that went anywhere. A similar program could even be done with cash transfers if banks have to report them over a certain amount.
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by andypanda »

Two years ago I was eating pizza and drinking a beer and talking to a guy I know about finances and such and where the money goes. I asked him what he did with the money he received from the sale of his business in 1999. He said he took a quarter million of it and gave each of his 5 sons $50k. Knowing how much he hates paperwork, I asked who filled out the 709s for him. He said, "The what?"

I do it the right way, but wonder why I bother.
Running Bum
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by Running Bum »

andypanda wrote: Wed Nov 24, 2021 9:48 am I do it the right way, but wonder why I bother.
So you aren't looking over your shoulder for the rest of your life?

If you think they never go after the little guy, look up "Charlie Engle mortgage fraud". He's pretty well known in the ultrarunning community. Even though he's kind of a polarizing figure, I don't know anyone who thinks he deserved what he got, which was serving 16 months in prison for lying about income on two mortgages. https://www.nytimes.com/2011/03/26/busi ... ocera.html

Not trying to take the discussion offtrack but I use this as my warning to not fudge on my income/estate taxes or other legal money dealings like this.

Edited to fix the spelling of Engle's name.
Last edited by Running Bum on Wed Nov 24, 2021 12:41 pm, edited 1 time in total.
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by delamer »

Running Bum wrote: Wed Nov 24, 2021 8:54 am If your sons have low enough income that capital gains wouldn't be taxed, you could grant stock or mutual fund shares with unrealized capital gains. They could see tax free and you've unloaded some possible tax liabilities. They don't get stepped up basis on a gift so it's not a good idea if they would pay cap gains. You might as well see if you can leave it to them in your estate where they would get stepped up basis.
We’ve done this a few times with our adult children, who currently are in the 0% bracket for long-term capital gains.
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by andypanda »

Certainly seemed like overkill at the time, but would Mr. Engle ever have come to the government's attention if he hadn't been on tv running across the Sahara without any visible means of support or a day job?

"...the renowned adventure racer and ultrarunner Charlie Engle, known for his epic 111-day, 4500-mile run across the Sahara..."
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alexcr
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by alexcr »

HueyLD wrote: Wed Nov 24, 2021 7:18 am My recommendation is that you want to write two checks at $15k (or $16k in 2022j each with your signature on one check and your spouse’s signature on the other check. This is to make it very clear that each person gifts only $15k ($16k in 2022).
Thank you. One additional nuance is that one of our two sons is outside the country through the end of the year, so we're sending him the money via Zelle, as opposed to by check.

So in his case, taking the approach you suggest won't be possible. Although I suppose we can break up his payment into two or more separate Zelle transactions, if that accomplishes anything. (We might need to do this anyway given the Zelle transaction size limits.)
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HueyLD
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

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“ In order to use Zelle®, the sender and recipient’s bank accounts must be based in the U.S.”

https://www.zellepay.com/support/can-i- ... nationally
capran
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by capran »

HueyLD wrote: Wed Nov 24, 2021 7:18 am
alexcr wrote: Wed Nov 24, 2021 6:25 am So this means that every American married couple, besides those living in the nine community property states, should be filing a 709 for the situation described, even if the funds are coming from a joint bank account?

I believe you, but this is surprising given all the people in this thread who don't seem to feel this is necessary. Unless all the folks who have been responding live in California, Texas, etc.?
My recommendation is that you want to write two checks at $15k (or $16k in 2022j each with your signature on one check and your spouse’s signature on the other check. This is to make it very clear that each person gifts only $15k ($16k in 2022).

The above process is out of an abundance of caution and I believe a good practice. I guess if you absolutely enjoy having a chance of filing form 709, then you may ignore my recommendation.

Good luck to you. Your children are very fortunate to have you as a parent.
I hope you are right, as we recently did just that i.e. two separate checks, each signed by a different spouse. We made a notation on the bottom of the check "2021 Gift" and also made a copy of both checks for our records. We only have one bank-a joint bank account, so we're hoping it is not treated as from one person given our documentation. Our entire estate is under 3mil so really don't have to worry that we would be over the limit when our time comes, but even the addition of one more IRS form is enough to keep me up at night.
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by Lee_WSP »

alexcr wrote: Wed Nov 24, 2021 6:25 am
Joey Jo Jo Jr wrote: Wed Nov 24, 2021 4:13 am A joint account in and of itself does not make the money community property, and Florida is not a community property state.

I think most (all?) non-community property states will treat joint account funds, even when married, as owned by the person who contributed the funds. Therefore, I think a check from one owner/spouse for $30k would require a 709 with gift splitting to stay within the annual exclusion (assuming no other gifts for the year to the donee).

In contrast, a $15k check from each spouse (assuming no other gifts for the year to the donee) SHOULD work, provided that each spouse can prove ownership of that amount at the time of the gift. However, because proving that may be impossible after donors have died (in and estate tax audit), the only way to be 100% sure is to use separate gifts from separate accounts or to file the 709.
So this means that every American married couple, besides those living in the nine community property states, should be filing a 709 for the situation described, even if the funds are coming from a joint bank account?

I believe you, but this is surprising given all the people in this thread who don't seem to feel this is necessary. Unless all the folks who have been responding live in California, Texas, etc.?
Not only is he generally correct about the state treatment, but that's how the IRS treats it. Citations in an earlier post of mine on this topic. Can provide them again if I'm actually questioned on this, but it's my job to know this.

There may be an exception for married individuals, I need to double check that one, but I don't recall one.

Now, first of all, it's not a topic on the IRS radar and if the funds were in fact contributed equally or nearly enough as to be unascertainable, then you've each gifted half of the total.

The penalty for such a failure to disclose is never going to be an issue unless you somehow used up all your exemption before you made the gift.
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by MarkNYC »

Joey Jo Jo Jr wrote: Wed Nov 24, 2021 4:13 am I think most (all?) non-community property states will treat joint account funds, even when married, as owned by the person who contributed the funds. Therefore, I think a check from one owner/spouse for $30k would require a 709 with gift splitting to stay within the annual exclusion (assuming no other gifts for the year to the donee).

In contrast, a $15k check from each spouse (assuming no other gifts for the year to the donee) SHOULD work, provided that each spouse can prove ownership of that amount at the time of the gift. However, because proving that may be impossible after donors have died (in and estate tax audit), the only way to be 100% sure is to use separate gifts from separate accounts or to file the 709.
Regardless of a particular state's treatment of jointly-owned spousal accounts, the IRS has its own rules for Estate Tax and Gift Tax. The wording of the gift tax instructions is confusing, but here's something that might provide more clarity. At IRS.gov there is a section called "Frequently asked questions about Gift Tax." One of the questions is: "What if my spouse and I want to give away property we own together?" The IRS answer is:

You are each entitled to the annual exclusion amount on the gift.(my bold) Together you can give $22k to each donee (2002-2005)...In 2018, 2019, 2020 and 2021 the total for you and your spouse is $30K.

Further evidence of this 50/50 treatment by the IRS can be seen in Estate Tax Return Form 706, Schedule E part 1, where 50% of a jointly-owned spousal account is automatically included in the gross estate of the decedent, regardless of how much each spouse contributed to the account.
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by Joey Jo Jo Jr »

MarkNYC, the IRS follows state law where applicable, such as determining which spouse made a gift. As I said, joint accounts are usually treated as owned by the person who contributed the funds under state law. However, IRC 2513 does provide gifts can be treated 50/50, even if not actually 50/50, but the spouses have to elect that treatment on a 709, which is what the OP is trying to avoid. Also, the 50/50 estate tax rule you referred to is for estate tax treatment, not gift taxes. IRC 2040. I realize that rule is inconsistent, but that’s the way it is.
MarkNYC
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by MarkNYC »

Joey Jo Jo Jr wrote: Wed Nov 24, 2021 8:23 pm MarkNYC, the IRS follows state law where applicable, such as determining which spouse made a gift. As I said, joint accounts are usually treated as owned by the person who contributed the funds under state law. However, IRC 2513 does provide gifts can be treated 50/50, even if not actually 50/50, but the spouses have to elect that treatment on a 709, which is what the OP is trying to avoid. Also, the 50/50 estate tax rule you referred to is for estate tax treatment, not gift taxes. IRC 2040. I realize that rule is inconsistent, but that’s the way it is.
Joey -- IRC Sec. 2513 deals with gifts by one spouse from that spouse's property. That is not the issue here. The IRS has clearly stated on their website (see quote above) that each spouse is entitled to the annual exclusion amount on one gift from an account that is jointly owned by the spouses. If you can cite any case in the past 20 years where the IRS has taken a position contrary to their own stated position on this issue, I would be interested to hear it.
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by Joey Jo Jo Jr »

But you DON’T own a joint account together, unless you are in a community property state. The law in other states very likely provides that joint account dollars are owned by the person that contributed them. That doesn’t mean both people on the account can’t spend the money, but one may legally be spending the other account owner’s money. I know this is a difficult concept for people to grasp.
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by MarkerFM »

We have a joint account that is owned by both of us but in practicality is used mostly only by my wife as her personal checking account. All accounts at Fidelity, Florida residents. We also each have revocable trust accounts, but most of our income accumulates in my account. When we make annual gifts, I transfer half the funds from my trust to the joint account and then to my wife's trust. I would transfer direct, but because of the way Fidelity treats the accounts, this is the only way I can do it online. Then each of our trust accounts make the gifts (again online) to the Crummey trusts for the kids. We do not file 709s.
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Re: Practical advice on taking advantage of the annual estate tax gift exemption?

Post by capran »

Joey Jo Jo Jr wrote: Wed Nov 24, 2021 9:25 pm But you DON’T own a joint account together, unless you are in a community property state. The law in other states very likely provides that joint account dollars are owned by the person that contributed them. That doesn’t mean both people on the account can’t spend the money, but one may legally be spending the other account owner’s money. I know this is a difficult concept for people to grasp.
Good to know. I had wondered since both our names appear on statements and we both have auto deposits. And if a google search is to be believed, Washington State is a community property state, so sounds like it's a moot point for us on our recent two separate gift checks.
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