Q: I received a non-taxable life insurance policy valued at $80,000 and want to share it with another sibling. Will my sibling have to pay taxes on the money?—Jeanne, Indiana
A: Your situation raises a good question about gifting to another individual in general, and it highlights a common misconception many people have about the tax ramifications, says Jason Miller, national head of financial planning for BMO Wealth Management.
“There’s an assumption in the question that it’s the recipient who would be responsible for the taxes on the gift,” Miller says. “Under our transfer tax system, it’s generally the donor who is responsible for any gift tax that would be due.”
There is an annual gift exclusion of $14,000 per recipient per year, according to IRS regulations. In other words, the you could give multiple siblings $14,000 each and not have to file any additional tax paperwork.
The situation gets a little more complicated if you want to split the $80,000 with a brother or sister, Miller says. Still, even though more tax paperwork is involved, there’s a good chance that your generous gift could be given without a tax penalty.
“If she gives $40,000 to the sibling, $14,000 is the exclusion, which means she’d have to file IRS form 709, a gift tax return,” he says. “It’s a taxable gift, but there’s actually no tax due on it.”
Complicated, indeed. Miller explains that in addition to the $14,000 exclusion, there also is a lifetime $5.49 million gift tax exclusion (the same threshold as the estate tax). So the first $14,000 of the $40,000 gift would be covered by the exclusion; the remaining $26,000 would count toward the lifetime exclusion.
“She can give the entire $80,000 away, assuming she hadn’t already given away $5.49 million,” Miller says.
A few things to know: The $14,000 limit doesn’t apply to gifts between spouses, and spouses can jointly gift $28,000. Documentation of gifts larger than that would have to be filed individually, Miller says; there is no joint gift tax return. If you want to split the $80,000 evenly with your sibling and don’t want to deal with the hassle of filing gift tax forms, you could parcel out the money over the course of a few years, $14,000 at a time.
There are a few notable exceptions to that $14,000 annual limit. If you want to pay for someone’s tuition or medical expenses, you can do so without incurring a tax, Miller says. The caveat here is the funds have to be paid directly to the institution or provider; in other words, you couldn’t write your nephew a check to cover his college bills, but you can make the payment directly to the college without any tax consequences.