Inter vivos gifts

What Are Inter Vivos Gifts?

An inter vivos gift is a legal term referring to a voluntary transfer of property or assets from one living person (the donor) to another (the donee) without receiving anything of comparable value in return. The Latin phrase "inter vivos" literally means "between the living." This type of gift is distinct because it occurs while the giver is alive, as opposed to transfers made after death through a will or other testamentary instruments. Inter vivos gifts are a fundamental component of estate planning and wealth transfer strategies, allowing individuals to distribute their wealth during their lifetime rather than solely through their estate.

History and Origin

The concept of taxing gifts made during one's lifetime emerged in the United States primarily to prevent the circumvention of estate taxes. The federal gift tax was initially introduced in 1924, though its structure and enforcement have evolved significantly over time. Its primary purpose was to unify the taxation of wealth transfers, ensuring that individuals could not avoid taxes on their estates simply by gifting away their property before death. The tax applies to gratuitous transfers of property made during each calendar year, with various adjustments and exemptions introduced through legislative acts over the decades.¹⁴,¹³ The Internal Revenue Service (IRS) provides extensive guidance on gift tax regulations and frequently asked questions related to these transfers.¹²

Key Takeaways

• An inter vivos gift is a transfer of assets made by a living donor to a living donee without expectation of return.
• These gifts are often used in estate planning to reduce the size of an individual's taxable estate.
• They can potentially help avoid the probate process for the gifted assets.
• Inter vivos gifts may be subject to gift tax regulations, depending on their value and applicable exclusions or exemptions.
• For an inter vivos gift to be legally valid, there must generally be a clear intention to make a gift, actual delivery, and acceptance by the recipient.,¹¹

Interpreting the Inter vivos gifts

Inter vivos gifts are interpreted within the context of estate planning and personal finance as a strategic method for managing and distributing wealth. Their primary benefit lies in the ability to reduce the size of a donor's taxable estate, potentially lowering future estate tax liabilities. When assets are transferred as inter vivos gifts, they are removed from the donor's estate, meaning they will not be subject to probate upon the donor's death.¹⁰ This can simplify the distribution process for beneficiaries and provide them with immediate access to funds or property.

However, the interpretation also involves understanding potential tax implications. While the recipient generally does not pay tax on the gift itself, the donor may be responsible for gift tax if the value of the gift exceeds the annual gift tax exclusion or the lifetime gift tax exemption.⁹ The recipient may also incur future tax obligations, such as capital gains tax, if they later sell appreciated gifted property.

Hypothetical Example

Consider an individual, Sarah, who owns a valuable piece of real estate with a fair market value of $500,000. Sarah wishes to gift this property to her daughter, Emily, during her lifetime to help Emily purchase a home and to reduce her own potential estate tax burden. This would be an inter vivos gift.

In 2025, the annual gift tax exclusion is $19,000 per recipient. The total lifetime gift tax exemption for an individual is $13.99 million.⁸

1. Gift Execution: Sarah executes a deed transferring the property to Emily. This transfer is an irrevocable transfer and occurs while Sarah is alive.
2. Gift Tax Implications: Since the $500,000 gift significantly exceeds the $19,000 annual exclusion, Sarah would need to file a gift tax return (IRS Form 709). The excess amount ($500,000 - $19,000 = $481,000) would be subtracted from Sarah's $13.99 million lifetime gift tax exemption. Assuming Sarah has not used much of her lifetime exemption previously, she would likely not owe any gift tax at the time of the transfer.
3. Emily's Basis: Emily's basis in the property for future capital gains tax purposes would typically be Sarah's original basis, not the $500,000 fair market value at the time of the gift. This is a crucial consideration for the donee.

This example illustrates how inter vivos gifts facilitate wealth transfer during a donor's lifetime, but also highlights the importance of understanding current tax rules.

Practical Applications

Inter vivos gifts have several practical applications in personal finance and estate planning:

• Estate Tax Reduction: By transferring assets during their lifetime, individuals can reduce the value of their gross estate, potentially lowering estate taxes upon their death. This is particularly relevant for those with substantial wealth that may exceed federal or state estate tax thresholds.⁷
• Avoiding Probate: Assets transferred as inter vivos gifts are no longer part of the donor's estate and thus avoid the potentially lengthy and public probate process. This ensures quicker access to assets for beneficiaries and maintains privacy.
• Financial Assistance: Donors can provide immediate financial support to family members, such as helping a child with a down payment on a home, funding education, or assisting with medical expenses. Gifts made directly to educational institutions for tuition or to medical providers for care are often exempt from gift tax regardless of amount.⁶
• Charitable Giving: Inter vivos gifts to qualified charitable organizations can not only support worthy causes but also offer tax benefits to the donor, such as deductions from taxable income. The IRS provides specific guidelines on deductible charitable contributions.⁵
• Establishing Trusts: Assets can be placed into certain types of trusts as inter vivos gifts, offering control over asset distribution, asset protection, and additional tax planning opportunities.

Limitations and Criticisms

While inter vivos gifts offer notable advantages in estate planning and wealth transfer, they also come with limitations and potential drawbacks.

One significant limitation is the loss of control over the gifted asset. Once an inter vivos gift is completed, it is typically an irrevocable transfer, meaning the donor no longer has any legal claim or control over the property. This can be problematic if the donor's financial circumstances change unexpectedly or if the relationship with the donee deteriorates.

Another consideration is the income tax basis. Unlike assets inherited after death, which often receive a "stepped-up" basis to their fair market value at the time of death, assets received as inter vivos gifts generally retain the donor's original cost basis.⁴ This can lead to a higher capital gains tax liability for the recipient if they later sell the gifted asset, especially if it has appreciated significantly since the donor acquired it.

Furthermore, while gifts within the annual gift tax exclusion are straightforward, larger inter vivos gifts reduce the donor's lifetime gift tax exemption. If the donor's total lifetime taxable gifts (those exceeding the annual exclusion) surpass this lifetime exemption, the donor will owe gift tax. It is crucial to understand these thresholds, which are adjusted periodically. For instance, the lifetime exemption in 2025 is $13.99 million per individual, but future legislative changes could significantly alter this amount.³

Inter vivos gifts vs. Testamentary Transfers

The key distinction between inter vivos gifts and testamentary transfers lies in when the transfer of assets occurs.

Confusion often arises because both strategies involve transferring wealth. However, the timing of the transfer significantly impacts tax implications, control over assets, and the administrative process of distribution. Inter vivos gifts are proactive distributions, while testamentary transfers are reactive to the event of death.²

FAQs

What assets can be given as an inter vivos gift?

Virtually any type of asset can be transferred as an inter vivos gift, including cash, real estate, stocks, bonds, personal property like jewelry or vehicles, and even interests in businesses. The key is that the donor intends to transfer ownership immediately and irrevocably.

Do inter vivos gifts always avoid taxes?

No, inter vivos gifts do not always avoid taxes. While the recipient typically does not pay income tax on the gift itself, the donor may be subject to gift tax if the value of the gift to any single donee in a calendar year exceeds the annual gift tax exclusion. Amounts exceeding this annual exclusion will reduce the donor's lifetime gift tax exemption.¹

Is it better to gift assets during life or at death?

The "better" approach depends on individual circumstances, financial goals, and tax considerations. Gifting assets during life (inter vivos gifts) can reduce your taxable estate and avoid probate. However, recipients of inter vivos gifts typically inherit the donor's original cost basis, which could lead to higher capital gains tax when they eventually sell the asset. Assets passed at death often receive a stepped-up basis, which can reduce capital gains for the inheritor. Consulting with an estate planning professional is recommended to determine the most advantageous strategy.