THE SEASON OF GIVING

The end of the year is coming quickly. At this time of the year, people often wonder whether or not they should give a monetary gift in order to reduce their assets somewhat for estate planning purposes. In other words, should they gift $10,000 to some or all of their family, perhaps, their children?

Almost everyone has heard that you can gift $10,000 a year. Many people who have a sufficient amount of assets to live comfortably believe that they should make a $10,000 a year gift to their immediate family members in order to reduce or eliminate “death taxes.”

It is true that everyone can make an “annual exclusion gift” free of gift tax. The annual exclusion gift was $10,000 a year, but it is now $11,000. What the annual exclusion gift means is that a person can gift $11,000 each and every year to an unlimited number of people (the recipients of the gift do not have to bear a special relationship to the gift-giver, such as family member) without paying gift tax.

And it is the person who makes a gift that would pay gift tax, not the person who receives the gift. To the recipient, a gift is a tax-free event; the recipient does not pay any type of tax whatsoever. Yes, that’s right, not even income tax. A gift is not income, it’s a gift. Did you ever pay income tax on a Christmas or birthday present that you received?

There are other exclusions to gift tax. For instance, one very large exclusion to gift tax of which most people are unaware is the $1,000,000 lifetime exclusion. A person can gift $1,000,000 in their lifetime without paying gift tax. In addition, a person can pay another person’s tuition at a school or medical bills without paying gift tax or reducing his $1,000,000 lifetime credit. Finally, a person can gift unlimited amounts of money to charities without paying gift tax or reducing his $1,000,000 lifetime credit.

So, a person would have to gift more than $1,000,000 to even begin to pay tax – that is, gift tax – on the gifts he made. In addition, he can make an unlimited amount of $11,000 gift each and every year, provided that each gift is to a different person, and he can pay unlimited amounts for other persons’ tuition and medical bills and make unlimited contributions to charity without reducing his $1,000,000 lifetime credit.

Boy, a guy would have to make a lot of gifts – and have a lot of money in the first place – to ever have the potential of paying gift tax, wouldn’t he?

Better still, for a married couple, each spouse receives a $1,000,000 lifetime credit and each spouse can make $11,000 annual exclusion gifts and unlimited gifts for tuition, medical bills, or charity. A couple can truly be munificent without fear of the taxman.

With all of that said, gifting can be a useful estate planning tool for many people, rich and not-so-rich. For those who are worth millions, the ability to give $11,000 a year to an unlimited number of people can be very useful. For instance, assume that a widow worth $3,000,000 has three children and eight grandchildren. If she were to die with $1,000,000 in the year 2004, her estate would pay somewhere around $750,000 in estate tax, both federal and state. Needless to say, that’s a lot of tax.

If she gives away $11,000 to each of her three children and each of her eight grandchildren, she will reduce her estate by $121,000 each year. So, if she gave such gifts within the next two weeks, before the end of 2003, then once again in 2004, she’d very quickly reduce her estate by almost a quarter of a million dollars and save about half of that amount in estate tax. It’s easy to see how such gifting over a period of only a few years can save an estate a tremendous amount of taxes.

Even for people who aren’t worth millions, gifting can be beneficial. For instance, New Jersey imposes an estate tax on estates worth more than $675,000. If a woman had an estate worth $800,000 and were to gift $125,000 to her child (no need to engage in the $11,000 annual gifting because the she doesn’t have more than $1,000,000 and she can gift up to $1,000,000 in her lifetime without paying gift tax), her estate would pay no estate tax, if she lived for three years after the gift was made. That’s the catch with New Jersey’s estate tax, you have to live for three years after making the gift for the gift to not be brought back into your estate.

If you are thinking about making an $11,000 gift and you have an estate worth more than $1,000,000 so that gift tax is a potential issue for you, then you have to make the gift before the end of 2003 for it to count in the 2003 tax year.