The Season of Smart Giving!
The Holidays call to our mind the spirit of selflessness and charity, and in such a spirit, we present gift to loved ones or worthwhile charities. What exactly is a “gift?” Almost everyone knows that giving to charity helps reduce the tax bill, but how? How do you prove something is a gift rather than a loan? These are only some of the legal issues that present themselves when dealing with gifts.
First, a “gift” is made by meeting three elements: (1) delivery, (2) intention to make a gift on the part of the donor (person giving the gift), and (3) absolute disposition by him of the thing which he intends to give to another—in other words, you will not take it back. Gifts can be conditional, such as an engagement ring, which is given in contemplation of marriage. An engagement ring is a conditional gift until the marriage is solemnized, only at that time does it become an absolute gift. Gifts can be given while living or dead. Most gifts are given to another while the donor is alive, but testamentary gifts are given when the donor is dead. This can be accomplished through a Will or a Letter of Last Instructions, which must be identified in the Will and signed by the person making the gift.
Second, gifting can have great tax benefits! If one has a larger estate, usually over $1,000,000, he or she can gift down the size of the estate to avoid the death tax. One can also give to charity. That gift can be counted as a deduction when calculating income. But make sure that your gift is to a qualified organization; giving a gift to a for-profit corporation will probably not qualify. These gifts must be documented, so be sure to receive a receipt for your gift. Also note that gifts do not need to be cash; services or goods can be gifts as well. All estate and gift planning must be done under the guidance of an attorney because extraordinary pitfalls and tax traps can cost you dearly.
Finally, documentation is important, especially if you are loaning rather than gifting. If you are making a loan, be sure to get the borrowers signature, with the amount owed, and the payback terms. This will go a long way in any potential litigation. A Christmas card full of cash will normally be considered a gift, unless there is a note inside the card clearly stating otherwise. Receipts, as mentioned above, are crucial for proving gifts to organizations for tax purposes. Keep them well organized for your tax preparer! Remember that your accountant is billing by the hour, so disorganization will cost you! Consider the administrative costs of your gifts and what you can do to reduce unnecessary expenses. This ensures that the gifts cost what you actually expect them to cost. Yes, it’s the thought that counts when giving a gift, but with a bit of smart thinking your gift can be beneficial both to your recipient and yourself.
