Gifting Index Funds - Tax Implications Questions

[randomperson5]

My fiancée and I have been together for close to 10 years and have been operating and making life decisions as if we have shared finances (although obviously not legally shared finances). Over time, our individual accounts have become unbalanced due to a variety of factors (salary differences, job changes due to relocations, etc.). I am looking to balance our individual net worth's closer to 50/50 by gifting >$200,000 to my fiancée via in-kind transfer of index fund shares. I wanted to be careful with this process given the large sum of money and potential tax implications. I'd like to seek guidance from the experts here on a few questions:

1. I understand this is well in excess of the 2024 annual gift tax exclusion of $18,000 and I would have to file Form 709. My understanding is that this would debit (~ $200,000 - $18,000 = $182,000) from my lifetime gift tax credit, but I would not incur a tax liability. Is this a correct assumption or am I missing anything here?
2. It seems that the lifetime gift tax exclusion is likely reverting back to pre-TCJA levels where it'll be reduced from $12.92 mil to closer to $5 mil. In my case, would I be left with $5 mil - $200,000 = $4.8 mil remaining in my lifetime gift tax exclusion assuming I make this gift later in 2024?
3. Is there anything I need to be mindful of in the case of an in-kind transfer of index fund shares? Am I correct in the assumption that there should be no taxable event (e.g. capital gains, dividends, other distribution, etc.) associated with an in-kind transfer of index funds via a brokerage transfer (for different accounts owned by two different people within the same brokerage)?

Thanks all!

[M-MTax]

1. Is this a correct assumption or am I missing anything here? Correct......no gift tax liability at this point.
2. $5 mil - $200,000 = $4.8 mil remaining in my lifetime gift tax exclusion No one knows what it will revert to but you get a credit against tax and that credit will be whatever it is at the time you incur liability less whatever amount you have used in the past.
3. Is there anything I need to be mindful of in the case of an in-kind transfer of index fund shares? Yes. The donee fiancee will take a basis in the shares that is the LESSER of your basis....cost.....OR the fair market value on the date of the gift. You probably don't want to gift any shares in which you have an unrealized loss.

[Mike9241]

not quite. the lifetime exclusion is now over $13.6M and generally you can make unlimited gifts to your spouse without having to file.  

*********
Gifts to your spouse. You must file a gift tax return if you made
any gift to your spouse of a terminable interest that does not
meet the exception described in Life estate with power of
appointment, later, or if your spouse is not a U.S. citizen and the
total gifts you made to your spouse during the year exceed
$175,000.
You must also file a gift tax return to make the qualified
terminable interest property (QTIP) election described under
Line 12. Election Out of QTIP Treatment of Annuities, later.
Except as described earlier, you do not have to file a gift tax
return to report gifts to your spouse regardless of the amount of
these gifts and regardless of whether the gifts are present or
future interests.

[rjs]

The OP is planning to make a gift to fiancée, not spouse. They "have been together for close to 10 years," so the fiancée becoming the spouse might not be happening in the near future.

[Opus 17]

Your fiancé needs to keep meticulous records of your cost basis, in case the broker does not.

[M-MTax]

Your fiancé needs to keep meticulous records of your cost basis, in case the broker does not.

The cost basis and the market value on the date of the gift will be on the 709. Just retain the 709.

[Opus 17]

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@M-MTax wrote:

Your fiancé needs to keep meticulous records of your cost basis, in case the broker does not.

The cost basis and the market value on the date of the gift will be on the 709. Just retain the 709.

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That's not enough (well, probably not).  You really should check with the broker before you make the gift.

If you have been investing over time, you have a number of shares that all have different cost bases.  Just guessing at a fund name ("Vanguard index fund") I find for example VFIAX, which has a share price of between $200 and $500 over the past 10 years.  If you invested $1000 per year, you might have bought 5 shares in 2014, 5 shares in 2015, and so on, but only 2 shares in 2024.  You might have 35 shares worth $17,500 with a cost basis of $10,000.  That's all well and good, assuming you give all 35 shares to your fiancée.  

However, what happens when your fiancee wants to sell some shares to pay for (oh, I don't know, maybe a wedding 😉).  If she closes her position, her basis is $10,000.  But what if she only wants to raise $5000 so she sells 10 shares.  Is she selling the first shares (cost basis $2000), or the most recent 10 shares (cost basis $5000).  Does she know which shares she is selling?  Does the broker know which shares she is selling?  The broker knows if you sell the shares, and you can choose first-in or last-in method.  But did the broker transfer those records to your fiancee when the gift was made?

If the broker reports the 1099-B as "basis unknown" then your fiancee needs to report the basis herself and be able to prove it if audited, and also needs to know which shares she claims to be selling now so she will know what shares she has left to sell later.  

And if you only give your fiancee some of your shares in a particular fund, which shares are you giving and what is their basis?  Different shares have different bases depending on when you bought them.  Do you want to give her the oldest shares or the newest shares?

Maybe I am overthinking this and the broker will take care of everything.  But I would ask first. 

[M-MTax]

That's not enough (well, probably not).

Yeah it is. The 709 will contain all the relevant information....dates, basis, FMV of each security. At least it should if prepared properly.

[Mike9241]

@rjs It was meant as a suggestion that there could be better tax consequences if the gift was not made until married. however, the final decision is his. 

[Opus 17]

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@Mike9241 wrote:

@rjs It was meant as a suggestion that there could be better tax consequences if the gift was not made until married. however, the final decision is his. 

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And of course, if they are in a community property state, there would be no point to the gift once they were married; and if they are in a common law marriage state, they might be married already. 😉

[M-MTax]

if they are in a common law marriage state, they might be married already. 

LOL, yeah, but not really. Even in the few common law marriage states that still exist a couple has to hold themselves out to the public as being married. These folks are holding themselves out as being engaged.....so that won't work.

[randomperson5]

Thanks everyone! Really appreciate the detailed responses. I didn't really consider how complicated the cost basis aspect of this would be. I'll have to give it some more thorough research and likely post back here in the near future for further input.  😊

[M-MTax]

Just remember to use care not to gift.....in kind....securities in which you have unrealized losses. The donee then has to use the lesser of your cost or the FMV on the date of the gift. A loss means your cost was higher than the FMV on the date of the gift so your fiancée would have to use the FMV as the basis, meaning your fiancée would never be able to take advantage of that previously unrealized loss. 

Example: Your cost was $1000 and the FMV on the date of the gift is $800. Your fiancée takes $800 as the basis so that $200 loss is gone forever.