Our clients in Arkansas have many estate tax questions. But one question that we see from them relates to the Arkansas gift tax. Every estate plan should consider gifting strategies.
If you live in Arkansas, this guide will discuss how the gift tax works and cover some of the laws and rules. The gift tax requirements can be challenging, so let’s jump in.
Table of contents
What is the gift tax and how does it work?
First, let’s discuss what the IRS calls a gift. A gift occurs when a person gives something of value to someone else and receives nothing in return or something worth less than what was given.
The IRS will levy a gift tax when a gift is made over the annual exemption amount. The majority of gifts are made in cash, but they also can be made with property, like real estate, stocks, bonds, business interests, and even cars, boats, and other personal items.
What is the Arkansas Gift Tax?
Let’s get to the issue at hand. Arkansas does not even levy a gift tax. The state has no restrictions or limits on lifetime gifting.
But don’t forget that the IRS gift tax is still applicable. That’s why careful planning is so important.
Tell me about the federal gift tax
IRS law allows an individual to give away $15,000 to any other person annually. This gift may be made to an unlimited number of people without triggering a tax return to be filed. Additionally, the gift will not go against the lifetime exemption.
For example, let’s assume that a married couple has four children, and each of them gives $15,000 to each child. This is $60,000 per spouse and $120,000 for the married couple in total.
Filing a Gift Tax Return: Form 709
Let’s take a look at the gift tax return process. Form 709 is the IRS gift tax return that discloses all gifts made over the annual exclusion.
For example, assume you gift $23,000 to your daughter. Since the gift is over the annual exemption, it is considered a taxable gift. The following results:
- IRS Form 709 should be filed to report the $8,000 that exceeds the annual exclusion.
- The IRS will not assess a gift tax as long as the transfer did not go over the lifetime exemption amount.
How to Legally Avoid the Arkansas Gift Tax
As you know, Arkansas law does not have a gift tax. But don’t forget that you can still get caught in the IRS gift tax.
There are a handful of strategies that we use to reduce the taxable estate. Here are a few planning ideas:
- Charitable Remainder Trusts
- Lifetime Gifting
- Grantor Retained Income Trusts
- Grantor Retained Annuity Trusts (GRATs)
- Qualified Personal Residence Trusts (QPRTs)
- Special Valuation for Farms and Businesses
- Minor Trusts
- Crummey Trusts
- Family Limited Partnerships (FLPs)
- Grantor Retained Unitrusts (GRUTs)
You should have a basic understanding of the IRS gift tax. The good news is that it only impacts fewer than 1% of Arkansas households. But people with large estates should pay attention.
Gifting strategies are an effective estate planning strategy and usually are the first step in the process. Use gifting as a tool in your toolbox and develop an estate strategy with your attorney, CPA, and financial advisor.