What Is Gift Inter Vivos?
A gift inter vivos is a legal term referring to a transfer of assets or property made by an individual during their lifetime to another living person or entity. Derived from Latin, meaning "between the living," this type of gift is a fundamental concept in Estate Planning, distinguishing it from transfers that occur after death. Unlike bequests made through a will, a gift inter vivos is typically immediate and irrevocable, meaning the donor relinquishes all control and ownership of the gifted asset once the transfer is complete. The recipient of the gift is known as the beneficiary. These gifts can encompass various forms of property, including cash, real estate, stocks, or other valuables.
History and Origin
The concept of a gift inter vivos has deep roots in common law, stemming from Roman legal principles that distinguished between transfers made during life and those taking effect upon death. The Latin phrase "inter vivos" itself directly translates to "between the living," underscoring its nature as a transaction occurring between individuals who are both alive. This legal distinction has long been crucial for determining ownership, validity, and the tax implications of asset transfers. Historically, the irrevocability and immediate effect of an inter vivos transfer have been key characteristics, differentiating them from testamentary transfers which are contingent on the donor's death.
Key Takeaways
- A gift inter vivos is a transfer of assets made by a person while they are still alive.
- These gifts are generally irrevocable, with the donor relinquishing all control.
- They can be a strategic component of estate planning, potentially reducing a future estate tax liability.
- Gifts exceeding certain limits are subject to federal gift tax rules, requiring reporting to the IRS.
- Making gifts inter vivos allows the donor to witness the impact of their generosity and provide support when it is most needed.
Interpreting the Gift Inter Vivos
A gift inter vivos is primarily interpreted through its legal validity and its tax implications. For a transfer to be legally considered a gift inter vivos, several elements must generally be met: the donor must have the intent to give, the gift must be delivered, and the beneficiary must accept the gift. Once these conditions are met, the transfer is usually complete and irrevocable.
From a financial perspective, understanding the rules surrounding the gift tax is crucial. The Internal Revenue Service (IRS) establishes an annual exclusion amount, which is the sum an individual can gift to any other person within a calendar year without incurring gift tax or requiring the filing of a gift tax return. For example, in 2025, this annual exclusion is \($19,000\) per recipient12. Amounts gifted above this annual exclusion begin to reduce the donor's lifetime exemption from gift and estate taxes. The lifetime exemption for 2025 is \($13.99\) million per individual11. It's important to note that the donor, not the beneficiary, is typically responsible for any gift tax owed10.
Hypothetical Example
Consider Sarah, who wishes to help her grandson, David, purchase his first home. In 2025, Sarah gifts David \($50,000\) to assist with the down payment. This is a clear example of a gift inter vivos, as Sarah is alive when she makes the transfer, and David receives the funds immediately without providing anything in return.
Since the annual gift tax exclusion for 2025 is \($19,000\)9, Sarah's gift of \($50,000\) exceeds this amount by \($31,000\) (\($50,000 - $19,000 = $31,000\)). Sarah would need to file a gift tax return (IRS Form 709) to report this \($31,000\) "taxable gift." This amount would then reduce Sarah's lifetime exemption by \($31,000\). Assuming Sarah has not used any of her lifetime exemption previously, she would not owe any gift tax in the current year, as the gifted amount is well below her \($13.99\) million lifetime exemption8. This strategy allows Sarah to see the immediate positive impact of her financial support on David's life.
Practical Applications
Gifts inter vivos serve several practical applications in personal finance and wealth management. They are frequently used as a core component of estate planning to reduce the size of a taxable estate, potentially lowering future estate tax liabilities upon the donor's death. By utilizing the annual gift tax exclusion, individuals can transfer significant wealth over time without incurring immediate gift tax.
Beyond tax advantages, a gift inter vivos allows donors to provide financial assistance to heirs or other beneficiaries when the funds are most needed, such as for education expenses, a down payment on a home, or starting a business. This enables the donor to witness the positive impact of their generosity directly. For instance, a grandparent might establish a trust or make direct gifts to help fund a grandchild's college education or a first home purchase. Such intergenerational transfers can have a significant effect on the financial well-being and mobility of recipients, as highlighted in research by institutions like the Federal Reserve Bank of St. Louis7.
Limitations and Criticisms
While advantageous, gifts inter vivos come with certain limitations and potential criticisms. A primary drawback for the donor is the irrevocability of the gift; once the asset is transferred, the donor permanently loses control and access to it. This loss of control can pose a risk to the donor's own long-term financial security, particularly if unexpected expenses arise or if they live longer than anticipated6.
Another significant consideration involves tax implications for the beneficiary, specifically concerning the cost basis of gifted assets. When an asset is gifted during the donor's lifetime, the beneficiary generally receives the donor's original cost basis (known as a "carryover basis"). This differs from assets inherited after death, which typically receive a "stepped-up basis" equal to the asset's fair market value at the time of the donor's death. Consequently, if the beneficiary later sells the gifted asset, they may face a higher capital gains tax liability compared to inheriting the same asset5. Furthermore, gifts made outright may become subject to the beneficiary's creditors or be affected by divorce proceedings4.
Gift Inter Vivos vs. Testamentary Gift
The key distinction between a gift inter vivos and a testamentary gift lies in the timing and revocability of the transfer.
| Feature | Gift Inter Vivos | Testamentary Gift |
|---|---|---|
| Timing | Made by the donor during their lifetime. | Takes effect only upon the donor's death. |
| Revocability | Generally irrevocable once completed. | Revocable and amendable by the donor until death. |
| Legal Document | No specific legal document required for simple gifts; may involve deeds or trust agreements for complex assets. | Requires a formal will or trust document. |
| Control | Donor relinquishes all control over the asset. | Donor retains full control until death. |
| Probate | Assets typically avoid probate. | Assets generally subject to probate, unless held in certain trusts. |
| Basis for Donee | Carryover basis (donor's original cost basis). | Stepped-up basis (fair market value at death). |
A gift inter vivos, as its Latin name suggests, occurs "between the living," while a testamentary gift is a distribution dictated by a will or other estate planning document that only becomes effective after the donor's passing. For instance, putting an asset into an irrevocable trust during one's lifetime is a form of gift inter vivos, whereas a bequest made through a revocable trust or will that can be changed is testamentary.
FAQs
1. Does a gift inter vivos have to be reported to the IRS?
Not all gifts inter vivos need to be reported to the IRS. You only need to report a gift if its value to a single recipient in a calendar year exceeds the annual gift tax exclusion. For 2025, this amount is \($19,000\) per person3. Even if a gift exceeds this amount, you typically won't owe gift tax unless your total lifetime taxable gifts (those exceeding the annual exclusion) surpass your lifetime exemption, which is \($13.99\) million for 20252.
2. Can a gift inter vivos be taken back?
Generally, no. A hallmark of a true gift inter vivos is that it is irrevocable. Once the gift is delivered and accepted, the donor relinquishes all ownership and control, and cannot reclaim the asset. This is a critical legal aspect that distinguishes it from other forms of asset transfer.
3. What are the benefits of making a gift inter vivos?
Making a gift inter vivos can offer several benefits. It allows the donor to see the positive impact of their gift during their lifetime. It can also be a strategic tool in estate planning, potentially reducing the size of one's taxable estate and therefore the future estate tax liability. Gifts using the annual exclusion can transfer wealth tax-free over time.
4. Is the recipient of a gift inter vivos taxed on it?
In most cases, the recipient (or beneficiary) of a gift inter vivos does not pay income tax on the value of the gift. The responsibility for paying any gift tax generally falls on the donor1. However, the recipient might face future capital gains tax if they sell the gifted asset and its value has appreciated significantly, due to receiving the donor's original cost basis.