Gift Splitting

Gift splitting is a clever tax-planning strategy available to married couples in the United States. Think of it as a “two-for-one” deal on generosity, courtesy of the IRS. In essence, it allows one spouse to make a gift to a third party (like a child or grandchild) and have it legally treated as if both spouses made it, each contributing half. This lets the couple combine their individual annual gift tax exclusions, effectively doubling the amount they can give to any single person in a year without having to pay gift tax or dip into their lifetime gift and estate tax exemption. It’s an especially useful tool when one spouse has significantly more liquid assets than the other, but both wish to contribute to a substantial gift. For savvy investors, it’s a simple yet powerful way to transfer wealth efficiently and reduce the size of their future taxable estate.

The magic of gift splitting lies in how it leverages the annual gift tax exclusion. Understanding this concept is key to seeing its power.

Every year, the U.S. government allows each individual to give up to a certain amount of money or property to as many people as they like, completely tax-free. This amount is known as the annual gift tax exclusion. For example, in 2024, this amount was $18,000 per donor, per recipient. This means you could give your son $18,000, your niece $18,000, and your best friend $18,000, all in the same year, without any tax consequences or even needing to file a tax form. Your spouse can do the exact same thing.

This is where it gets interesting. Let’s say a married couple, David and Sarah, want to give their daughter, Emily, a significant sum to help with a down payment on a new home.

• Without Splitting: David could give Emily $18,000, and Sarah could also give her $18,000 from her own account. Emily receives a total of $36,000, and no gift tax forms are required because each gift was within the individual annual exclusion limit.
• With Splitting: Now, imagine all the cash is in David’s investment account. He writes a single check to Emily for $36,000. This amount is over his individual $18,000 exclusion. However, David and Sarah can elect to “split” the gift. By filing the proper paperwork, they tell the IRS to treat this $36,000 gift as if David gave $18,000 and Sarah gave $18,000. The result is the same—Emily gets $36,000 tax-free—but it was made possible even though the funds came from only one spouse.

At first glance, it might seem like a bit of paperwork for a simple goal. But gift splitting is a cornerstone of smart wealth management for several reasons.

1. Accelerate Wealth Transfer: It allows a couple to pass down twice as much wealth each year, tax-free. Over many years, this can add up to a substantial amount of money transferred to the next generation without ever touching the lifetime exemption.
2. Powerful Estate Planning Tool: For individuals with large estates, gift splitting is a fantastic way to reduce the total value of their estate over time. A smaller estate may mean a smaller potential estate tax bill down the road. Think of it as proactively managing your legacy.
3. Provides Flexibility: It harmonizes a couple's gifting goals, regardless of whose name is on the bank account. It allows the couple to act as a single, more powerful economic unit when it comes to supporting their loved ones.

To use this strategy, you must follow the IRS rules precisely.

• The couple must be legally married at the time the gift is made.
• Both spouses must be U.S. citizens or residents.
• The gift must be made to a third party, not to each other.
• Both spouses must formally consent to splitting all gifts made by either of them during that calendar year. You can't pick and choose which gifts to split.

This is the non-negotiable part. To elect gift splitting, you must file Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax Return. This is required even if no tax is due. On the form, you will officially declare your consent to split the gift. Both spouses must sign the consent section for the election to be valid. This form is typically due on April 15th of the year following the gift.

Value investing is about more than just buying undervalued assets; it's about the intelligent, long-term stewardship of capital. Gift splitting fits perfectly into this philosophy. While it's not an investment strategy itself, it is a crucial wealth preservation tactic. A true value investor understands that returns can be eroded by fees, inflation, and—importantly—taxes. Minimizing tax drag is essential to maximizing long-term, multi-generational wealth. By using a tool like gift splitting, an investor ensures that more of their hard-earned capital reaches its intended destination. It's the final step in the value creation process: protecting the value you've built so it can benefit your family for years to come.