Gift Tax

Awww, those IRS people. They ruin everyone’s fun.

You can’t even give things away anymore without it being taxed. Anyone have some tea we can spill into a harbor? Boston gift tax party anyone? No? Oh, well.

So, overly simply, as of 2019, you’re allowed to gift 15 grand a year with the expectation that this number will rise a bit year after year...and on that 15 grand or less, there is no tax owed.You have to declare to the IRS people that you gifted but you don't have to write them an incremental check.

And all kinds of little tweaks to the definitions of givers and receivers have made estate transfer easier in this country. For example, a family can gift in multiple directions from multiple sources. Like, each year, Mama Bear can gift 15k to Baby Bear, then 15k to sulky Teenager Bear, then another 15k to the Elder Bear, for a total of 45k gifted from Mama Bear.

Then Daddy Bear can do the same for each kid...such that they can gift, in one year, 90 thousand dollars total in gifts with no tax. And there are other twists. Like...they aren’t limited to gifting cash. They can gift art, jewelry, mountain-vats of honey or porridge...or private stock.

So hmm, you may reasonably wonder, "How would they determine the value of private stock, or really any of the above non-actively-traded-and-valued things?" There isn’t a daily market for shares in private companies...so how does the IRS assess value?

Well, usually value is taken at whatever the last round was invested at, even if it was 5 years ago and the company has gone up a ton in value. But if it has, it’s likely the company will have been required to get a new 409a valuation, which is basically just a few high-priced lawyers assessing what the company is worth based on other, similar companies that were sold or funded recently. That is, it's the best guess of lawyers and accountants.

And the same applies to appraisals of jewelry and art and the like. So you can imagine that, if a family wanted to transfer as much as they possibly could to their kids, the impetus could involve a whole lot of downward pressure on valuations, such that the 15k that was tax-free gift-able...might really be worth something more like 20k, 30k, 50k even...were it to sell that day.

That said, private valuations carry all kinds of risk to the giftees as well. They can (and often do) die, leaving the recipient with a whole lot of Kleenex to wipe away the tears of relative poverty. Maybe discounting private things makes sense. The key is that it’s 15k of value that can be transferred.

So what happens if Mama Bear gives Baby Bear 20k in cash one year, for a top-of-the-line, Dr. Brown’s Porridge Warmer? Well, either Baby Bear can just pay income tax on the 5 grand difference and, in fact, it’s Mama Bear who would technically be legally responsible for paying that tax, but Baby Bear can do it if she wants, or she can write Mama Bear a check for 5k back. It’s the net number that the IRS cares about.

And if they find that it balances out…well, then everything is juuuuuust right.