Gift Splitting

Gift splitting is the election by which spouses treat gifts made by one of them to someone else as made one-half by each. Internal Revenue Code section 2513 provides that "a gift made by one spouse to any person other than his spouse shall, for the purposes of this chapter, be considered as made one-half by him and one-half by his spouse."

The statute's own heading is "Gift by husband or wife to third party," which names the transaction rather than the election. The phrase people use, and the phrase the IRS uses in the Form 709 instructions, is gift splitting, and Schedule A of the return carries a column headed "Split Gifts." Both names are correct and neither is a misnomer; the statutory heading simply describes what is happening while the common name describes the choice being made.

What the election achieves, and what it costs in consent, filings and joint liability, is covered under gift tax and Form 709. This page is about the conditions and consequences that sit underneath it, most of which are not obvious from the fact that a couple may double up.

The election is all or nothing for the calendar year, and this is the most consequential planning fact about it. Section 2513(a)(2) applies the treatment "in the case of all such gifts made during the calendar year by either while married to the other." The Form 709 instructions repeat it in plainer words: "The consent is effective for the entire calendar year; therefore, all gifts made by either you or your spouse to third parties during the calendar year (while you were married) must be split." A couple who consent in order to shelter one large gift have also split every other gift either of them made that year, including gifts one spouse would rather have kept to their own exclusion.

Citizenship or residence is tested at the moment of the gift. Section 2513(a)(1) permits the treatment "only if at the time of the gift each spouse is a citizen or resident of the United States." The Form 709 instructions express the same requirement as a condition to be checked: "Neither of you was a nonresident not a citizen of the United States at the time of the gift." A couple who become residents later in the same year cannot reach back.

The marriage tests are stricter than being married, in a way that bites in exactly the wrong year. The statute treats a person as a spouse "only if he is married to such individual at the time of the gift and does not remarry during the remainder of the calendar year." The instructions apply it to the facts a reader is likely to have: "If you were divorced or widowed after you made the gift, you cannot elect to split gifts if you remarried before the end of" the year. A widow who makes gifts in February, is widowed in June and remarries in November cannot split the February gifts, though she could have if the new marriage had waited until January.

One kind of gift is carved out entirely. The section does not apply "with respect to a gift by a spouse of an interest in property if he creates in his spouse a general power of appointment, as defined in section 2514(c), over such interest." Where the donor spouse hands the other spouse a general power over the same interest, the halving rule is switched off for that gift.

A mixed gift has an extra condition. The instructions provide: "If you transferred property partly to your spouse and partly to third parties, you can only split the gifts if the interest transferred to the third parties is ascertainable at the time of the gift." A transfer that leaves the third-party share to be worked out later fails the test, which is a drafting point rather than a valuation one.

The revocation window is asymmetric, and the asymmetry is a genuine trap. Section 2513(c) provides that the right to revoke a consent "shall not exist after the 15th day of April following the close of such year if the consent was signified on or before such 15th day; and shall not exist if the consent was not signified until after such 15th day." So an on-time consent is revocable up to that April 15 and then locked. A late consent is locked the moment it is given, with no window at all. Section 2513(b)(2)(A) adds a second closing mechanism that has nothing to do with the calendar: if neither spouse has filed a return for the year by that April 15, the consent may not be signified after a return for the year is filed by either of them. Filing early therefore closes the door early.

A deficiency notice ends the possibility altogether. Under section 2513(b)(2)(B), consent "may not be signified after a notice of deficiency with respect to the tax for such year has been sent to either spouse in accordance with section 6212(a)." A couple who discover the election would have helped them only once the IRS has raised an assessment are out of time.

Two narrow exceptions let one spouse file alone. The default where the election is made is that both spouses file their own returns. Exception 1 applies where only one spouse made any gifts during the year, the total value of gifts to each third-party donee is no more than twice the annual exclusion of $19,000, and all the gifts were of present interests. Exception 2 applies where only the donor spouse made gifts above $19,000 to any one donee but no more than twice that amount, the consenting spouse's own gifts were within $19,000 and went to different donees, and all the gifts were of present interests. In either case "only the donor spouse must file a return and the consenting spouse signifies consent on that return."

Two smaller mechanics worth knowing. Where the election is made, Schedule A takes "the entire value of every gift you made during the calendar year while you were married, even if the gift's value will be less than $19,000 after it is split," with the halving shown in the split-gifts column rather than by entering half at the outset. And consent is not always the spouse's own to give: the instructions provide that "the executor for a deceased spouse or the guardian for a legally incompetent spouse may indicate the consent."

Working through the election.

1. Check the conditions at the time of each gift. Married to each other, both a citizen or resident, and no remarriage by either of them later in the year.

2. Understand the scope. Consenting splits every gift either spouse made to a third party during the calendar year while married, not the one gift that prompted the question.

3. Report the whole gift. Each gift goes on Schedule A at its full value, and the halving is shown in the split-gifts column.

4. File. Both spouses file their own returns unless one of the two narrow exceptions applies, in which case the donor spouse files and the other signifies consent on that return.

5. Mind the deadlines. Consent must be signified by April 15 following the year of the gift, or earlier if a return for the year has already been filed, and not at all once a notice of deficiency has gone out.

A hypothetical example of the all-or-nothing rule. Marisol gives her daughter $60,000 in September from her own account. In March of the same year her husband Anton had already given his nephew $40,000 from his.

If they consent to split gifts, the September gift is treated as $30,000 from Marisol and $30,000 from Anton, which is exactly what they wanted. But the election reaches the March gift too. Anton's $40,000 to his nephew is treated as $20,000 from him and $20,000 from Marisol, so part of her exclusion has been used on a gift she did not make and had no view about.

If they do not consent, Marisol's $60,000 is hers alone and Anton's $40,000 is his. There is no version in which the September gift is split and the March gift is not. The election is a decision about the year.

What the election is good for

• It lets a couple use both exclusions where the money and the accounts sit with one of them, which is the ordinary situation in many marriages.
• It reaches gifts already made earlier in the year, so the decision can be taken with the year's facts in hand rather than in advance.
• Two narrow exceptions spare a couple a second return in the simplest cases.
• Consent can be given by an executor for a deceased spouse or a guardian for a spouse who is legally incompetent, so incapacity does not automatically close the option.

The costs and the traps

• It is all or nothing for the calendar year, so a gift one spouse wanted to keep to themselves is swept in with the rest.
• Remarriage later in the same calendar year disqualifies the election even for gifts made while the earlier marriage was intact, which lands on people in the year they are least likely to be reading the statute.
• Consent signified after April 15 following the year of the gift cannot be revoked at all, so a late election is permanent from the moment it is made.
• Filing a return early closes the consent window early, because consent may not be signified after a return for the year has been filed by either spouse.
• Where one spouse gives the other a general power of appointment over the same interest, that gift falls outside the section altogether.