Gift Giving

To prevent you from giving away your life's riches on your deathbed in order to avoid estate (death) tax, the government implemented gift tax.  The maximum rate for gift tax for 2007-2009 is 45% of the value of gifts you make to friends, family or others (e.g., a $100,000 gift to your daughter could cost you an additional $45,000 in gift tax to the IRS).  However, there are some exceptions which can be utilized as excellent estate planning devices:

  § Lifetime giving - Presently, each person is entitled to give away up to $1,000,000 in gifts during their lifetime without incurring any gift tax.  This lifetime exemption is significant and will shield many gifts from taxation.  However, for each dollar you use under your lifetime exemption, you loose a dollar of your credit exemption for estate taxes.  If, for example, you make gifts during your lifetime totaling $200,000, your estate tax credit will be reduced from the current $2,000,000 to $1,800,000.  Any assets you have in excess of this credit when you pass will be taxed at the current rate of 45%;

  § Annual giving - Annual gift giving is an effective way to pass wealth from one generation to another without incurring any gift or estate taxes or using up your lifetime credit exemption.  Currently, you are entitled to give away money or other assets to any person totaling $12,000 per year without incurring any gift tax.  If, for example, you have two children and three grandchildren that you want to make gifts to, you are entitled to give each of them $12,000 per year for a tax-free total of $60,000.  If your spouse contributed too, you could double that total gift to $120,000 per year; 

Another benefit of annual gift giving is that you avoid future estate taxation of the assets.  If you were to continue this gift plan for ten years, you would transfer $1,200,000 to your family without incurring any gift or estate taxes.  If you wait to transfer this same $1,200,000 upon your death, estate taxes could total as much as $540,000 (the actual figure depends on many variables, but could be more or less).  Estate taxes are avoided because the assets you give away are no longer part of your estate and therefore not subject to estate taxes when you pass;

  § There is no gift tax for the payment of tuition made directly to an educational institution or for the payment of medical care to a medical care provider.  It is important to make these payments directly to the institution or provider.  If you make them to the recipient of the gift as reimbursement for payments he or she previously made or will make, they will be subject to gift tax.  Many grandparents take advantage of this exclusion and make tuition payments on behalf of their grandchildren whether or not their children can afford the payments;

  § Gifts between spouses may be made tax-free without any limits with respect to frequency or amounts.