Gift splitting: Meaning, Criticisms & Real-World Uses

What Is Gift Splitting?

Gift splitting is a provision under U.S. federal tax law that allows a married couple to treat a gift made by one spouse to a third party as if it were made one-half by each spouse. This strategy is a crucial component of effective tax planning, particularly for individuals looking to minimize potential gift tax obligations. By electing to split gifts, a couple can combine their individual annual gift tax exclusion amounts, effectively doubling the tax-free gift amount that can be given to any single recipient in a given year. It also enables couples to utilize both spouses' portions of the lifetime gift tax exemption for larger transfers, potentially reducing their overall tax liability on wealth transfers. The election to split gifts must be formally made on IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return²⁴, ²⁵.

History and Origin

The concept of gift splitting emerged as part of the broader framework of federal estate and gift taxes in the United States. These taxes have evolved significantly over time, with various legislative changes impacting their scope and application. For instance, the Economic Growth and Tax Relief Act of 2001 (EGTRRA) and the American Taxpayer Relief Act of 2012 (ATRA) notably altered exemption amounts and tax rates for both the estate tax and gift tax²³. The intent behind gift splitting was to equalize the tax treatment of gifts made by married individuals in common law states with those in community property states. In common law states, assets are generally considered to belong to the individual who acquired them, while in community property states, assets acquired during marriage are typically considered owned equally by both spouses²². By allowing gift splitting, Congress enabled couples in all states to leverage both spouses' annual exclusions and lifetime exemptions for gifts to third parties, regardless of which spouse originally owned the gifted asset. This mechanism helps facilitate efficient wealth transfer strategies.

Key Takeaways

Gift splitting allows married couples to treat a gift made by one spouse as if it were made half by each.
This election effectively doubles the available annual gift tax exclusion for gifts to a third party, from one donor's amount to two.
It also permits the utilization of both spouses' lifetime gift and estate tax exemptions for larger transfers.
Gift splitting requires both spouses' consent and must be reported on IRS Form 709.
The election applies to all qualifying gifts made by either spouse to third parties during that calendar year.

Interpreting Gift Splitting

Gift splitting is a strategic election that can significantly impact a couple's overall tax liability related to gifts and future bequests. When a donor spouse makes a gift that exceeds their individual annual gift tax exclusion, electing to split the gift with their spouse means that only half of the gift is attributed to each spouse's exclusion and lifetime exemption. This can delay or avoid the need to use a portion of the lifetime exemption, preserving it for larger future transfers or for the taxable estate at death. The application of gift splitting is an all-or-nothing election for the year; if elected, all qualifying gifts made by either spouse to third parties during that calendar year are split²¹. It's a critical tool in comprehensive financial planning for affluent families.

Hypothetical Example

Consider John and Jane, a married couple. In 2024, the annual gift tax exclusion is $18,000 per recipient. John decides to give a gift of $36,000 to their daughter, Sarah.

Without Gift Splitting: If John does not elect gift splitting, the entire $36,000 gift is attributed solely to him. Since this amount exceeds his individual annual exclusion of $18,000, he would have to use $18,000 of his lifetime gift tax exemption to cover the excess.
With Gift Splitting: If John and Jane elect to split the gift, the $36,000 gift to Sarah is treated as if John gave $18,000 and Jane gave $18,000. Because each of these amounts is equal to or less than their individual annual gift tax exclusion of $18,000, neither John nor Jane would need to use any of their respective lifetime gift tax exemptions. This allows the couple to transfer the full $36,000 to their recipient entirely free of gift tax and without reducing their unified lifetime exemption, preserving it for future taxable estate planning.

Practical Applications

Gift splitting is a cornerstone strategy in estate planning and wealth management. It is primarily used to:

Maximize Annual Exclusions: By splitting gifts, married couples can effectively double the amount they can give to any individual annually without incurring gift tax or requiring the use of their lifetime exemption. For example, in 2024, a couple can jointly give $36,000 to each recipient without any gift tax implications²⁰.
Efficiently Use Lifetime Exemptions: For gifts exceeding the doubled annual exclusion, gift splitting allows a couple to utilize both spouses' lifetime gift tax exemptions, which are significant. The Congressional Budget Office (CBO) notes that these exemptions have grown substantially, with the federal unified gift and estate tax exemption set at $13.99 million per individual for 2025¹⁸, ¹⁹.
Reduce Taxable Estate: Through consistent annual gifting using the gift splitting election, couples can systematically reduce the size of their taxable estate over time, potentially lowering future estate tax obligations¹⁷.
Facilitate Gifting to Trusts: Gift splitting can also be applied to gifts made to certain types of trusts, such as irrevocable life insurance trusts, allowing more assets to be transferred outside of the taxable estate.

The Internal Revenue Service (IRS) provides detailed Instructions for Form 709 which outline the process and requirements for electing gift splitting¹⁵, ¹⁶.

Limitations and Criticisms

While gift splitting offers significant advantages, it comes with specific requirements and potential complexities. The election to split gifts applies to all gifts made to third parties during the calendar year by either spouse. It is an "all or nothing" election, meaning a couple cannot selectively choose which gifts to split and which not to¹⁴. Both spouses must be U.S. citizens or residents during the calendar year the gift is made, and they must be married at the time of the gift and remain married at the end of the calendar year (or if divorced, neither may have remarried)¹³.

One potential pitfall involves the generation-skipping transfer tax (GSTT)). While gift splitting also applies for GSTT purposes, careful planning is necessary to properly allocate the GSTT exemption and avoid unintended tax consequences¹². Additionally, errors in filing IRS Form 709 or failing to obtain proper consent from the non-donor spouse can invalidate the election, leading to unexpected tax liability ¹¹. Some critics of the overall estate and gift tax system, as detailed by institutions like the Brookings Institution, point to the complexity and various loopholes that have significantly reduced the number of estates subject to these taxes over time, questioning their effectiveness in raising revenue or addressing wealth inequality⁸, ⁹, ¹⁰.

Gift Splitting vs. Annual Gift Tax Exclusion

Gift splitting is a mechanism that interacts directly with the annual gift tax exclusion, rather than being an alternative to it. The annual gift tax exclusion is the maximum amount an individual can give to any other individual in a calendar year without incurring gift tax or reducing their lifetime gift tax exemption. For example, in 2024, this amount is $18,000 per recipient⁷.

Gift splitting allows a married couple to combine their individual annual exclusions. So, if one spouse makes a gift of $30,000 to their child in 2024, and the annual exclusion is $18,000, $12,000 would typically reduce that spouse's lifetime exemption. However, with gift splitting, the $30,000 gift is treated as $15,000 from each spouse. Since $15,000 is less than the $18,000 annual exclusion, neither spouse would use any of their lifetime exemption for this gift. The key difference is that the annual exclusion is an individual limit, while gift splitting is an election that allows a married couple to effectively use two such individual limits for a single gift made by either spouse to a third party.

FAQs

Q: Who can use gift splitting?
A: Gift splitting is available to married couples where both spouses are U.S. citizens or residents at the time the gift is made and remain married until the end of the calendar year⁶.

Q: Do both spouses need to file IRS Form 709 to split gifts?
A: Generally, the donor spouse must file IRS Form 709. The non-donor spouse must provide their consent to the gift splitting election, and if the total gifts attributed to them exceed their individual annual exclusion or if they made other reportable gifts, they may also need to file their own Form 709⁴, ⁵.

Q: Can I split gifts to my spouse?
A: No, gift splitting only applies to gifts made to third parties. Gifts made directly between spouses are generally not subject to gift tax due to the unlimited marital deduction, provided the recipient spouse is a U.S. citizen³.

Q: What happens if we divorce after making a split gift?
A: If the couple was married at the time of the gift and did not remarry before the end of the year, the gift splitting election generally remains valid. However, careful consideration is needed for any gifts made after the divorce².

Q: Does gift splitting affect the lifetime gift tax exemption?
A: Yes, gift splitting allows a couple to combine their lifetime exemptions for larger gifts. When a split gift exceeds the combined annual exclusions, portions of both spouses' lifetime exemptions are used, rather than solely one spouse's¹. This is a strategic way to manage their overall tax liability over time and for future bequests.