Some New Yorkers may take advantage of the gift-splitting election, through which each spouse may agree to split a gift to a third party in order to use both of their annual exclusions. This can help them avoid incurring a gift tax, but a recent case involving gift-splitting demonstrates couples need to be aware of certain things.
In the case, a husband gifted money to a grantor-retained annuity trust, and he and his wife signed a consent form agreeing to split the gift election. He then created a second GRAT and also gave money to fund it with he and his wife again filing their consent. Later, the man gifted funds to two additional GRATs in the same manner, again with filed consent from both spouses.
For all four GRATs, the husband had provided that at the end of the period of annuity, the funds would go to his wife. Later, the IRS audited the returns. The IRS issued a private letter ruling stating that while the two older GRATs were beyond the statute of limitations, the later two should have not been eligible for gift-splitting because the man’s wife was the beneficiary. They did rule that the man could choose to take just his own annual gift exclusion for the contributions he made.
Gift giving can be a good way for people to reduce the size of their taxable estate, but the gift must be made to a third party. In order to take advantage of the gift-splitting exclusion, people may want to discuss the best way to do so with their estate planning attorney who can advise a client about how to take advantage of the exclusion in an allowable manner.