A gift is a transfer of property from one person or entity to another person or entity that is made for a personal reason as opposed to a business reason. The property given as a gift should be voluntarily transferred to the other person or entity without compensation. The donor, the person who makes the gift, should intend that the transfer be permanent.
Gifts have a special place in the law. The law of gifts touches at least three legal arenas: tax law, property law, and estate law, i.e., wills, estates, and trusts.
For gift tax purposes, courts look to see if a gift is detached from any interest in any legal or moral obligation. For something to qualify as a gift in property law, a transfer should be made without any expectation on the part of the donor, the person making the gift, of benefiting from it in the future, e.g., by getting something in return.
Most states agree that a gift comes from a detached and disinterested generosity that stems from a person’s charity, affection, respect, admiration, or similar impulses. To determine if the property comes within the legal definition of a gift, courts consider the intent of the donor.
For example, suppose a person says to another, “I’ll give you my grandfather’s Rolex if you paint my house.” In this situation, the watch is not given as a gift. Rather, it is property given as payment for services rendered.
In this case, the Rolex would be considered taxable income to the person who receives it. This is because it was intended as payment for painting the house and not a gift transferred without compensation.
How Can I Prove the Elements of a Gift?
It can be difficult in some situations to prove the elements of a gift, and this is often a point of contention between the parties involved in a transaction. The best way to prove that a transfer of property qualifies as a gift is with evidence of the intent of the donor. The donor must intend to make a permanent transfer without any expectation of receiving something in return.
This can be done by providing evidence that the donor gave the property away freely and without expecting to receive value in return. In addition, it is important that the donor intends a permanent transfer of ownership of the property.
If a person wants to prove that they received something of value as a gift, it is important to have evidence of both the transfer of ownership and the donor’s intent. Sometimes, a person cannot prove that property given to them qualifies as a gift under the tax law. If not, then they might be required to pay federal and state income tax on its fair market value. Of course, a transfer could be a loan, in which case it would not count as income.
One way to avoid a dispute about the nature of a transfer is to take a few steps that could offer proof if a dispute develops:
- Make it clear at the time of transfer: Donors sometimes make a transfer before they have decided whether it is a gift or a loan. They may intend to figure it out later. It is better not to make a transfer until the intent of the donor is clear. Then, the donor can document the nature of the transfer clearly;
- Document the nature of the transfer: A donor and the recipient of the gift can work together to draft a statement that describes the nature of the transfer. In the document, the donor can describe the property and clearly express their intention, i.e., to make a permanent, unconditional gift of the property to the recipient. The donor and recipient might include pictures if that would help.
- Also, they could have witnesses to the transfer who sign their documents. Or they might even want to have the declaration notarized.
For example, a person may want to prove that a transfer of cash or another financial item is a gift. If this is the case, they would want to make a written declaration of their intention to give it to the recipient permanently and without consideration. Of course, if the transfer is a loan and not a gift, they want clear documentation of this as well.
In the case of a house, the donor can sign a property deed, which would transfer the property to the recipient. The deed would then be filed with the appropriate government office for the county in which the property is located, e.g., the register of deeds. This would be clear evidence of a transfer of ownership. The deed would serve as the document that proves that the recipient holds title to the property because the donor gave it to them.
In the case of a gift of a car, transfer of title to the car would be good evidence that a gift was made.
However, there could be written records or emails between the giver and receiver discussing the transfer of those assets as a gift. If there is, that could be evidence of an intent to donate or give the recipient something of value permanently and without compensation.
What Can Be Transferred as a Gift?
Any item of property can be transferred as a gift. Items of personal property, such as jewelry or artwork, can be given as gifts. Of course, real property can be given as a gift. And intellectual property also, copyrights, patents, and trademarks are examples of intellectual property that can be given as a gift by an owner. Of course, cash, stocks, bonds, and other financial interests can also be given as gifts.
Can I Legally Take a Gift Back?
A gift must be transferred to the recipient permanently to qualify as a gift. If the intent is not to give it to the recipient permanently, it is a loan.
It would probably not be a good idea to make a gift and then at a later date try to take it back. One of the reasons that making a gift of property is an issue of interest is that a person may have to pay a federal and state gift tax on the transfer.
The federal Internal Revenue Service (IRS) allows a person to give up to $17,000 in 2023 without having to pay a gift tax. If a person transfers property with a value greater than $17,000, they would pay a tax that ranges from 18% to 40% to the IRS as a gift tax. The state in which a person lives is also likely to collect a gift tax on the same transfer.
If a person were to make a gift in 2023 and pay the federal tax and possibly a state gift tax, they would probably not be able to get a refund of the tax if they were to change their mind and try to take the property back. As noted above, the best practice is for a person not to give a gift until they are completely sure of their intention to make a permanent transfer.
Do I Need a Lawyer for Assistance With a Gift?
Generally speaking, an attorney would be helpful in proving that a property transfer qualifies as a gift since there are often legal requirements that must be met in order for a gift to be valid.
If you are ever unsure about the status of a transfer of property, then you want to consult an estate attorney. LegalMatch.com can connect you to an estate attorney who can advise you on how to make a gift, how to document it, and whether you would owe a federal or state gift tax. The best time to talk to an attorney is before you make any transfer so you can do it properly and avoid disputes in the future.