Gift Letter Template for Financial Assets

What is a Gift Letter and Why Do You Need One?

A gift letter is a formal, written record of a gift of money or assets from one person to another. It documents key details like the donor, recipient, dollar amount or description of the gift, and date. Importantly, it also makes clear that the money or item is a gift, not a loan to be repaid.

Having a gift letter is crucial for several reasons:

• It provides a clear record of the gift for both the giver and recipient. This can help avoid misunderstandings about whether the money was a loan or a gift.
• It may be required documentation for the recipient to claim the money as a gift and not income, for tax purposes.
• If the recipient later applies for Medicaid long-term care coverage, the gift letter shows that the transfer was not an attempt to hide assets.
• For large gifts, it supports the giver's required Gift Tax Return on IRS Form 709.

In short, gift letters protect both parties and create a valuable paper trail. While it may feel unnecessary among family, taking a few minutes to put it in writing can prevent future headaches.

Essential Elements to Include in Your Gift Letter

To serve its purpose, your gift letter should include the following key facts:

1. Donor information: The full name and address of the person giving the gift.
2. Recipient information: The full name and address of the person or entity receiving the gift.
3. Gift details: The exact dollar amount for monetary gifts, or item description for physical assets.
4. Date: The exact date the gift was or will be transferred.
5. Relationship: An explanation of the relationship between the donor and recipient, such as parent and child.
6. Gift statement: Most importantly, the letter must include an explicit statement that the money or item is a gift given willingly, and is not expected to be paid back.
7. Signature: The letter should be signed and dated by the donor.

Including these core elements creates a thorough record and shows a clear intention to give a gift. It's also wise to keep copies of any related documents, like bank statements showing the funds transfer.

Legal Considerations When Gifting Money or Assets

Before gifting, it's wise to understand the relevant laws and tax rules. A few key points:

• Gifts under the annual exclusion amount are not counted toward your lifetime gift and estate tax exemption. For 2023, that exclusion is $17,000 per recipient.
• Gifts over the annual exclusion count toward your lifetime exemption, which is currently $12.92 million. Once met, you may owe gift taxes.
• You must report gifts over the annual exclusion to the IRS on Form 709. The recipient generally owes no tax.
• Special rules apply to gifts to spouses, medical and educational institutions, political organizations, and charities. Consult the IRS or an estate attorney for details.
• Gifted assets are not subject to capital gains tax for the recipient until they sell the asset. Then the gain or loss is based on your original cost basis and transfer date value.

Proper documentation, like a gift letter, helps ensure you're following the rules. If you have concerns, it's best to get professional tax or legal guidance to avoid any missteps.

Step-by-Step Guide to Writing Your Own Gift Letter

Now that you understand the why and what of gift letters, let's walk through how to write one.

1. Start with the date. Write the full date at the top of the letter.
2. Identify yourself. Begin the letter with your full name and address.
3. Identify the recipient. Write the recipient's full name and address.
4. State your relationship. Explain how you are related or connected to the recipient.
5. Describe the gift. Provide the dollar amount or describe the gifted item in detail. For monetary gifts, it's wise to include the account numbers the money is being transferred to and from.
6. Declare the gift and your intent. State in clear language that you are voluntarily providing this money or item as an outright gift, with no expectation of repayment in any form. An example: "I lovingly give this gift of $10,000 freely, and I do not expect any repayment or compensation now or in the future."
7. Sign and date the letter. End the letter with your legal signature and the date.
8. Make copies. Make a copy of the signed letter for both your own and the recipient's records. It's wise to keep it with copies of bank statements or other transfer documents.

A clear, detailed gift letter doesn't have to be long. The goal is to unambiguously document the key facts of the gift. When in doubt, have an estate attorney review your letter to ensure it's legally sound.

Gift Letter Dos and Don'ts

To sum up the key points, here's a quick checklist of gift letter best practices:

DO:

• Use clear, specific language
• Include full names and addresses for donor and recipient
• State the exact dollar amount or provide a detailed item description
• Explicitly state you expect no repayment or compensation
• Sign and date the letter
• Make copies for your records
• Consult an estate attorney or tax advisor if you're unsure about anything

DON'T:

• Use vague, unclear phrasing about the nature of the transfer
• Skip key details like account numbers, dates, or stated values
• Describe it as a loan or use language implying repayment
• Forget to sign and date the letter
• Discard copies of supporting documents like bank statements
• Neglect to report properly to the IRS if needed

A well-constructed gift letter protects all parties and simplifies record keeping. It's worth the effort to ensure peace of mind for everyone involved.

Using a Gift Letter Template for Smooth Transfers

If you're not confident drafting a gift letter from scratch, don't worry. Using a template ensures you don't miss any essentials.

Most gift letter templates have designated blanks to fill in key details like:

• Donor name and address
• Recipient name and address
• Gift amount or description
• Date of transfer
• Your relationship to recipient
• A clear gift statement

Templates also often include standard phrasing for the gift declaration, like: "I am gifting this money/asset voluntarily and do not expect any repayment in cash or services, now or in the future. This is not a loan."

Using an attorney-reviewed template tailored to your state ensures your letter is clear, complete, and legally sound. It can turn a daunting task into a simple fill-in-the-blanks exercise.

To find a good template, consult local legal aid organizations, your financial institution, or estate planners and attorneys. A sound gift letter template is an essential tool when gifting assets.

Keeping Good Records of Your Gifts

Whenever you gift substantial assets, it's wise to keep thorough records. Your gift documentation file should include:

• Copies of the signed and dated gift letter
• Any acknowledgment of receipt from the recipient
• Bank statements or transfer confirmations showing the money leaving your account and entering the recipient's
• Copies of IRS Form 709 if you filed one for the gift
• Any related appraisals or valuation statements
• Documented details of physical items, like VIN for vehicles

Keep your gift documents with your other important financial records, like tax returns. Having a complete paper trail helps ensure all parties are on the same page and protects you in case of any future questions from tax agencies or Medicaid.

It's also a good idea to let your estate executor or power of attorney know where you keep copies of gift letters and records. That way they are fully informed and prepared to manage your estate according to your wishes.

Wrapping Up - Documenting Gifts Made Easy

Dealing with finances after a loss is challenging. Having clear templates and instructions can make the heavy work of estate transfers a bit lighter.

A well-crafted gift letter is essential to smart money management, but it doesn't have to be a daunting task. Using the strategies outlined here, you can document asset gifts with clarity and peace of mind:

• Understand what a gift letter is and why it's important
• Include the essential elements in your letter
• Be aware of basic legal and tax considerations
• Follow the step-by-step guide to draft your own
• Use an attorney-approved template for simplicity and accuracy
• Keep thorough records of all your gifts

With this roadmap, you're equipped to confidently navigate the gifting process. You can create a legally sound letter that protects your interests and preserves family harmony - both priceless gifts in themselves.

For the complete gift letter template and more resources on estate transfers, visit the MyFinalPlanner.org gift letter template page.