Our clients in Alaska have plenty of estate tax questions. But one issue that comes up is the Alaska gift tax. No estate planning is complete without discussing gifting strategies.
If you reside in Alaska, this article will break down how the gift tax works and point out some laws, rules, and requirements. Gift tax structuring can be complicated, so try to hang in there.
Table of contents
What is the gift tax and how does it work?
First of all, let’s define what a “gift” is in the eyes of the IRS. A gift occurs when an individual gives something with value to someone else and receives nothing back or something worth less than what was provided.
The IRS will impose a gift tax when a gift is made over the annual exemption amount. Gifts are usually made in cash, but they can also be made with property, like real estate, stocks, mutual funds, business interests, cars, boats, and other personal items.
What is the Alaska Gift Tax?
Let’s get some good news out of the way. Alaska does not have a gift tax. The state also does not have a limit on lifetime gifting. Any gifts made during your life will reduce your estate.
But remember that you still could have an issue with the federal gift tax. Critical planning is vital if you have a significant estate.
What about the federal gift tax?
IRS gift tax rules allow anyone to give away $15,000 to any person annually. This amount can be made to an unlimited number of people, with no requirement to file a gift tax return. In addition, it does not go against the lifetime exemption.
Let’s take a look at an example. Assume that a married couple with two children gives away $15,000 to each child. This is $30,000 per spouse and $60,000 for the couple in total.
If their kids are married, they can also give another $15,000 to each of their children’s spouses. With a large estate, the married couple could give away a significant amount depending on how many kids they have.
IRS Gift Tax Return: Form 709
So let’s discuss how a gift tax return works. Form 709 is the gift tax return used to report a gift made over the annual exclusion.
For example, assume you gave $23,000 to your daughter. Because the gift exceeds the annual exemption, the IRS would consider it a taxable gift. As a result:
- Form 709 is required to be filed to disclose the $8,000 amount that exceeds the annual exclusion.
- No gift tax is assessed as long as the gift was not more than the lifetime exemption.
How to Legally Avoid the Alaska Gift Tax
As you well know, Alaska does not have a gift tax (nor does it have an estate tax). But you still could be facing the federal gift tax.
There are some strategies you should consider. These can go a long way to lower your estate. Here are few ideas to consider:
- Family Limited Partnerships (FLPs)
- Qualified Personal Residence Trusts (QPRTs)
- Special Valuation for Farms and Businesses
- Minor Trusts
- Charitable Remainder Trusts
- Lifetime Gifting
- Grantor Retained Income Trusts
- Crummey Trusts
- Grantor Retained Annuity Trusts (GRATs)
- Grantor Retained Unitrusts (GRUTs)
At this point, you should have an understanding of how the federal gift tax works. But the good news is that it will only affect less than one-half of 1% of Alaska residents. People with large estates need to take notice.
We usually implement gifting strategies as the first step in the estate planning process. Ensure you develop a plan with your financial advisor, accountant, and estate attorney before it is too late.