IRS Form 709 | Gift and Generation | Skipping Transfers: Recent Updates and Common Mistakes

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Fewer taxpayers are subject to gift taxes thanks to a $12,920,000.00 lifetime gift tax exemption for 2023. Because many taxpayers do not fall under the exemption amount, they do not necessarily have to file a gift tax return. However, taxpayers who are required to file a Form 709 should know about common mistakes made on Form 709 to avoid incurring tax liabilities from the Internal Revenue Service (“IRS”).

A Few Updates

Taxpayers should be aware of the following updates regarding IRS Form 709. Notably, in 2020, in response to the Coronavirus Pandemic, the IRS enabled Form 709 to be accepted digitally and with digital signatures. Other updates to IRS Form 709 include:

Why Use IRS Form 709

IRS Form 709 should be filed with a taxpayer’s return in a given tax year when they make a taxable gift. The person making the gift, called the “donor,” is responsible for the taxes owed, not the beneficiary. According to the IRS, a “gift” is defined as “[a]ny transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”

Taxpayers use IRS Form 709 to report: (1) transfers subject to the federal gift and certain generation-skipping transfer (GST) taxes and to figure the tax due, if any, on those transfers; and (2) allocation of the lifetime GST exemption to property transferred during the transferor’s lifetime.

This form reports taxable gifts made by a taxpayer to others during the taxpayer’s lifetime, such as cash or real estate. Also, the taxpayer will use IRS Form 709 to allocate lifetime generation-skipping tax exemptions when transferring property to a beneficiary who is not a spouse and is at least 37½ years younger than the donor.

Common Mistakes on IRS Form 709

If taxpayers aren’t paying close attention, they can make some common mistakes on IRS Form 709. Some financial gifts are not subject to the gift tax. Generally, these gifts include those that fall within the annual exclusion limit, gifts made to a spouse, transfers to political organizations [1] or certain exempt organizations [2], and educational and medical payments made on behalf of another individual. [3]

First, gifts of future interests, such as a donor’s transfer of assets or property to a trust for a beneficiary’s benefit, are not covered by the annual exclusion of $17,000 for 2023. Even if these transfers are less than $17,000, a taxpayer is required to report them. To qualify for the annual gift exclusion, the gift must be of a present interest for the beneficiary to immediately use.

Generally, gifts between spouses do not need to be included in IRS Form 709. But there are a few exceptions. If a taxpayer gives his or her spouse any terminable interest that does not qualify as a life estate with power of appointment, that terminable interest must be included in IRS Form 709. Additionally, charitable remainder trusts and gifts of future interests, as discussed above, must be included on IRS Form 709. Lastly, gifts made from one spouse to a spouse who is not a U.S. citizen do not need to be reported except when the gift exceeds the $175,000.00 annual exclusion for 2023.

Third, splitting gifts between spouses can cause confusion in properly completing the IRS Form 709. Spouses can agree to split gifts, meaning all gifts either spouse makes to a third party during the relevant calendar year will be viewed as being made one-half by each of the spouses. If spouses agree to split gifts, the consenting spouse must sign a consent form and file his or her own gift tax return, except for in two situations. The first situation occurs when the following three requirements are met: during the calendar year, (1) only one spouse made any gifts, (2) the total value of the gifts to each third-party donee does not exceed $34,000.00, and (3) all of the gifts were of present interests. The second situation occurs when, during the calendar year, (1) only the donor spouse made gifts of more than $17,000.00 but not more than $34,000.00 to any third-party donee, (2) the only gifts made by the consenting spouse were gifts of not more than $17,000.00 to third-party donees other than those to whom the donor spouse made gifts, and (3) all of the gifts by both spouses were of present interests.

Lastly, taxpayers with larger estates should be aware of generation skipping tax (GST) exemptions. The GST that a taxpayer must report on IRS Form 709 is that imposed only on inter vivos direct skips. An inter vivos direct skip is a transfer that is: (1) subject to the gift tax, (2) of an interest in property, and (3) made to a skip person. A donee is a skip person if that donee is assigned to a generation that is two or more generations below the generation assignment of the donor. The GST exemption can be allocated at any time so long as the allocation is on or before the due date for filing the donor’s estate tax return for their estate. If the taxpayer fails to allocate the exemption, the automatic allocation rules of IRC § 2632(b) will apply – these rules can muddle the situation and produce unintended and unfavorable outcomes for the donor taxpayer and the skip person beneficiary.

Gift tax returns can be complicated, and mistakes may be made due to the ever-changing rules. Despite some common mistakes on IRS Form 709, taxpayers can be assured that finding the right financial advisor, estate planner, and tax attorney can save them from enduring these headaches with the proper filings, due diligence, and tax disclosures.

[1] See I.R.C. § 527(e)(1).

[2] See I.R.C. §§ 501(c)(4)–(6).

[3] See I.R.C. §§ 170(b)(1)(A)(ii), 213(d); Treas. Reg. § 25.2503-6(c).