Rojas and Associates, CPAs

Estate and Income Tax planning - Gift Tax Exclusions

 If you’re like most people, you don’t like to think about planning your estate.  But it’s an important part of ensuring the financial security of your loved ones.  One of the most common tools used in estate planning - one that everyone should at least give careful consideration to - is a program of giving gifts.  A carefully planned gift-giving program can reduce that amount of your estate that is subject to tax while still passing on wealth.  This principle applies whether or not Congress sticks to its plan to gradually repeal the estate tax by 2010 while modifying the gift tax in the interim and on a permanent basis thereafter.

Gifts can also serve a function in your income tax planning by shifting income-producing or appreciated property to others who are in a lower tax bracket.  The maximum estate tax rates are phased down from 46 percent in 2006, down to 45 percent by 2007 - 2009, and with the income tax rates for individuals also being reduced by about 3 or 4 percentage points (depending on the bracket), gift giving can still yield significant benefits.

While large gifts are subject to gift taxation, you can give away up to $12,000 per recipient per year free of gift tax.  These gifts also do not reduce the amount that you can pass free of gift tax ($1 million lifetime exclusion, adjusted for inflation each year; $2 million if gifts are “split” with a spouse).

There is a great deal of flexibility in the types of property that can be transferred.  Gifts that qualify for the $12,000 annual exclusion can be made in money, property such as stocks or bonds, or even a life insurance policy, as long as the recipient gets the present right to possess or use the property.  The gift may be in trust if the terms of the trust give the recipient the immediate right to the property or income from the property.  If the recipient is a minor, the gift may be made to a custodian or legally appointed guardian of the minor’s property.  If the recipient is a child under 14, however, income from the property may be taxed at the parent’s marginal rate.

You and give up to $24,000 per recipient per year if you’re married and your spouse consents to “split” your gifts.  This is useful for spouses who do not own an equal amount of property.  The spouse with less property can consent to gifts made by the wealthier spouse, thereby effectively doubling the amount that the wealthier spouse can give away tax free.  To take advantage of “gift splitting,” both spouses must be U.S. citizens or residents.  The consent must be given on a gift tax return, so a return must be filed even if no gift tax is due.  However, a short form gift tax return is available.

One important thing to remember when you make a gift is that the recipient must take your basis in the property.  This means that if the recipient sells the property, any gain on the sale will be measured using what you paid for the property, not what the property was worth when he or she received it.  In contrast, if property is transferred to another through your estate, the recipient can use the value of the property at that time in measuring any gain on the sale of the property.  Consequently, choosing the right property to achieve your goals is an important aspect of any gift-giving program.

Another way to further the financial security of others without incurring gift tax is by payment of medical and educational expenses.  You can pay an unlimited amount for these expenses tax free as long as the payments are made directly to the medical services provider or educational institution.  The person you benefit does not need to qualify as a dependent for tax purposes.  Any medical expenses, however, must not be reimbursed by insurance, to either you or to the beneficiary.  Additionally, a recent decision allowed for a grandparent to prepay tuition for her grandchildren and this gift qualified for the unlimited gift tax exclusion, so long as the payments could not be refunded.

If used property, a program of gift giving can benefit everyone involved.  If you have any questions about the best way of using gifts as part of your overall financial plan, please call us.  Rojas and Associates:  916-362-4040

© 2008 CCH INCORPORATED.  All Rights Reserved.

Reprinted with permission from CCH.