The
federal government imposes a substantial tax on gifts of money or property above
certain levels. Without such a tax someone with a sizable estate could give
away a large portion of their property before death and escape death taxes
altogether. For this reason, the gift tax acts more or less as a backstop to
the estate tax. And yet, few people actually pay a gift tax during their
lifetime. A gift program can substantially reduce overall transfer taxes;
however, it requires good planning and a commitment to proceed with the gifts.
Advantages of Gift Giving
You may have many reasons
for making gifts -- for some gift giving has personal motives, or others, tax
planning motives. Most often you will want your gift giving program to
accomplish both personal and tax motives. A few reasons for considering a gift
giving plan include:
- Assist someone in
immediate financial need
- Provide financial
security for the recipient
- Give the recipient
experience in handling money
- See the recipient enjoy
the property
- Take advantage of annual
exclusion allowance
- Paying gift tax to
reduce overall taxes
- Giving tax advantaged
gifts to minors
Gift Tax Annual Exclusion
Probably the easiest way to
reduce the size of your taxable estate is to make regular use of the gift tax
annual exclusion. You may give up to $11,000 each year to as many persons as
you want without incurring any gift tax. If your spouse joins in making the
gift (by consenting on a gift tax return), you may (as a couple) give $22,000 to
each person annually without incurring any gift tax liability. Although the
$11,000 amount is set to index for inflation, the exclusion will increase only
in $1,000 increments, so it will probably not increase again for a few more
years.
Unlimited Gift Tax Exclusion
In addition to the $11,000
exclusion, there is an unlimited gift tax exclusion available to pay someone's
medical or educational expenses. The beneficiary does not have to be your
dependent or even related to you, although payment of a grandchild's expenses is
perhaps the most common use of the exclusion. You must make the payment
directly to the institution providing the service -- the beneficiary himself or
herself must not receive the payment.
Gift Programs and Your Estate
Use of the gift tax
exclusion in a single year may not affect your estate tax situation
significantly, but you can reduce your taxable estate substantially through a
planned annual program of $11,000 (or $22,000 if you are married) gifts. All
gifts within the exclusion limits are protected from federal estate taxes.
In addition to reducing the
size of your estate, another major tax advantage of making a gift is the removal
of future appreciation in the property's value from your estate. Suppose that
you give stocks worth $50,000 to your children now. If you die in 10 years and
the stock is worth $130,000, your estate will escape tax on the $80,000
appreciation.
Material discussed is
meant for general illustration and/or informational purposes only and it is not
to be construed as tax, legal, or investment advice. Although the information
has been gathered from sources believed to be reliable, please note that
individual situations can vary therefore, the information should be relied upon
when coordinated with individual professional advice.
Advisory Services offered through
Envision Investment Advisors, LLC., An SEC Registered Investment Advisory Firm.
(Envision & Crossroads Retirement are not affiliated.)
Gifting Strategies for Estate Planning
