Gifting of assets to the entering generation can be a valuable tool in the transfer process. Gifting can be used to:
- Help reduce a taxable estate.
- Transfer income tax obligations to children who may be in a lower tax bracket.
- Help get the next generation established.
- Gifts are always valued at fair market value (FMV) at the time of the gift.
For federal gift tax, each individual currently has an annual gift exclusion of $17,000 allowing you to gift that amount per person per recipient per year to as many persons as you wish and pay no gift taxes. Married donors who own property together can treat a gift as though each spouse has given half of it, so that together they can give $34,000 per recipient per year. They need to write two separate checks for $17,000 each or file an IRS 709 gift tax form.
You can give unlimited gifts to your spouse (marital deduction). If your spouse is a non-U.S. citizen, there are gifting limits; the limit amount changes frequently. You can gift unlimited gifts to a qualifying charity in any year with no gift tax consequence. You can also gift unlimited amounts for tuition or medical care.
The federal Tax Cut and Jobs Act of 2017 has permanently established the federal lifetime exclusion amount at $10 million and indexed it for inflation. For example, in 2023 every person has a lifetime gift exclusion of $11.92 million. Gifts given in excess of the annual exclusion ($17,000 per person, $34,000 per couple) reduce this lifetime exempted amount.
Note: Each individual, for the purpose of federal estate and gift tax purposes, has one exclusion amount equal to the applicable annual exclusion (2023 is $11.92 million). You do not have a $11.92 million exclusion for estate tax and a second exclusion of $11.92 million for gift tax. Each person has one exclusion amount and you can decide how to spend that exclusion amount — on estate taxes or gift taxes or a combination of both.
No gift tax is payable until the total federal lifetime exclusion amount is used up. However, a gift tax return (IRS Form 709) must be filed on gifts, to any individual other than your spouse, that exceed the annual $17,000 exclusion ($34,000 for a couple). If gift taxes are payable, they are generally paid by the donor (giver), not by the donee (recipient).
The Minnesota Gift Tax law was signed into law on March 21, 2014.
For property located in Minnesota, the value of gifts over the annual exclusion amount (recorded on the IRS 709 form) made within three years of the decedent’s death will be added back into the decedent’s estate to determine if Minnesota estate tax is due. The three-year add-back provision is retroactive and applies to estates of decedents dying after December 31, 2012.
The Minnesota gift add-back provision applies to the transfer of property located in Minnesota only. The add-back applies to Minnesota residents. It also applies to gifts of real estate and tangible personal property located in Minnesota but owned by any non-resident to determine if the non-resident must file a Minnesota estate tax return.
Minnesota residents transferring real and tangible personal property located outside Minnesota are not subject to the Minnesota gift add-back provision.
For annual gifts of $17,000 individually ($34,000 per couple), no tax is due and there is no IRS 709 or M709 form. For annual gifts of $17,001 up to federal and Minnesota gift exclusion individually ($34,001 up to federal and Minnesota gift exclusion per couple), no tax is due while the donor is alive, but the donor must file IRS 709 and M709 forms. For annual or lifetime gifts greater than federal or Minnesota gift exclusion, tax is due by April 15 the year following the year of the gift and the donor must file IRS 709 and M709 forms.
Gifts of appreciated property held long enough to qualify for long-term capital gains treatment (longer than 12 months for land, breeding livestock and machinery) could be gifted by parents in high tax brackets to children in low tax brackets to save taxes.
Gifting appreciated property to children under 18 or who are full-time students ages 19 to 23 can cause their income to be taxed at the parents’ top marginal tax rate or greater (“kiddie” tax provision). If recipient exceeds unearned income limits (amount changes each year - see your accountant), sale income will be taxed at the parent’s marginal tax rate if greater than the child’s rate.
Gifts of commodities are often used in parent-child transfers. Here are some consequences if gifting grain or livestock produced in the farming operation to the children:
If the fair market value (FMV) of the commodity is under $17,000 ($34,000 per couple), no gift tax or Form 709 is required.
The cash basis parent does not include the commodity on their tax return, thus reducing both income and self-employment (SE) taxes.
The child must show the income on their tax return and pay income tax, not self-employment tax, on the income (remember “kiddie tax provision”).
If the parent gifted the grain or livestock in the year of production, they must reduce deductible Schedule F expenses by the cost of producing the grain, but the child gets to use that carry-over of basis as an expense. If the gift is made with grain produced in a year prior to the gift, the basis is in the hands of the parent donor and the child donee’s basis is zero.
When giving commodities, the best advice is to give crops or livestock produced in the previous tax year.
Gifting machinery and equipment to the entering generation provides several advantages. It is often necessary for the entering generation to receive financial help in getting started in farming. Gifting of machinery can provide equity on their balance sheet. Gifting machinery can reduce the tax burden of the parents. If the parents are in a weak financial position and cannot afford to give away some property, perhaps the entire transfer process should be reevaluated as to its viability.
The donor’s remaining basis for depreciation on the gifted machine passes to the recipient of the gift.
If indebtedness on the gifted asset exceeds the donor's basis, the excess is considered a taxable gain to the donor at the time of the gift.
When you gift machinery, document the gift by stating it in writing. List the date of the gift, the donor and donee, the adjusted basis, the fair market value of the gift, the make, model and serial number. Sign and notarize the document effective the date of the gift. This eliminates any confusion over ownership, and you have protected the asset for your farming heir(s) if that is one of your goals.
You can gift land by deeding actual acres. This requires legal work when each gift is given.
You can also gift land by deeding an undivided interest in property to someone. This method may require less legal work.
Forming a business entity for the purpose of gifting land can be used. The parent can stay in control, if desired, but transfers entity ownership units or shares to the entering generation or other children over time.
After executing a contract-for-deed with their farming heir, some parents may decide they would like to occasionally forgive the annual payment.
The best procedure is to collect a check for the principal and interest payment and then issue a check to the farming heir for any gift you wish to make. Ignoring the check exchange can result in the farming heir not having complete evidence of having paid for the property. Drafting a payment schedule listing all principal and interest payments and payment dates is a good idea. When a payment is made, the parents should initial and date the payment schedule eliminating any doubt the farming heir has made payments and has control of the property in the event of the parent’s death. Properly document any gifts back to the heir.
Can you afford it?
Does gifting violate your goals? Gifting can be a very useful transfer and estate planning tool. But don't do it unless you can afford to give up the assets. Once an asset is gifted away you have no control of it and can expect no income stream from it.
If gifting jeopardizes your financial security or violates your farm transfer and estate planning goals, you might want to reconsider the strategy.
Gifting assets can cause eligibility issues if you are considering applying for Medicaid for long-term health care costs. In Minnesota, gifted assets are generally only protected from Medicaid/Medical Assistance (MA) spend-down calculation and long-term care costs IF 60 months have passed before the individual applies for MA. See an elder law attorney for help.
Caution: This publication is offered as educational information. It does not offer legal advice. If you have questions on this information, contact an attorney.
Reviewed in 2023