By FPA Member Amy Jo Lauber, CFP®
Last Updated: October 4, 2010
There are many reasons why people wish to make monetary gifts during their lifetime, including: to reduce their gross taxable estate, to transfer income–producing assets to a beneficiary who may be in a lower tax bracket, or simply because they wish to benefit someone and see them enjoy the gift.
U.S. citizens are allowed to give up to $13,000 per year to as many individuals as they like, without incurring any gift tax. In addition, you may give an unlimited amount directly to a school or medical provider on behalf of a family member or friend in addition to the $13,000. It may also interest you to know that there is currently a federal lifetime gift exclusion of $1 million, if you would like to make larger gifts during your lifetime, and gifts made between married persons are not subject to gift tax (or estate tax) if both spouses are US citizens; other rules apply to non-citizen spouses.
The annual gift tax exclusion applies to gifts of a present interest (meaning, the beneficiary must be able to use the gift immediately), but may also apply to certain gifts held in trust when the appropriate structures are put in place by an attorney (called “Crummey provisions”). The $13,000 per beneficiary per year limit includes all gifts, including those given for the beneficiary’s birthday, graduation or other occasion.
Married couples can make a “split gift” and give up to $26,000 per beneficiary. There will be a gift tax return due for reporting purposes if the couple plans to split gift, but if all of the rules are followed, no gift tax should be due. This strategy works especially well if one spouse has more liquid assets that are available to give.
For those who would like to provide funds for a child’s college education, the $13,000 may be front-loaded by up to five years in most 529 college savings programs, allowing up to $65,000 per beneficiary to be deposited in one year (there could be no subsequent contributions for that same beneficiary from that same donor for five years). Furthermore, as mentioned earlier, a person could cover the cost of tuition and fees (paid directly to the institution) on behalf of a beneficiary and may also pay for a beneficiary’s medical care (paid directly to the provider) above and beyond the annual exclusion limit.
There are some good reasons to utilize your lifetime gift exclusion ($1 million), including to reduce your gross taxable estate. For those individuals who may be subject to estate taxation, this strategy can reduce that tax burden, which may be especially difficult to bear when a family-owned business or some other illiquid asset comprises the majority of the decedent’s estate and there are few — if any — assets that are liquid to pay the tax.
A tactical gifting strategy includes giving low-basis stock to a child, young adult or an elderly parent or family member. A gift of this type typically (but not always) uses “carry-over basis” which means that the giver’s basis carries over to the beneficiary. This strategy is frequently recommended when the beneficiary is believed to be in a lower tax bracket and may subsequently pay less capital gain’s tax than the donor would. It is important to consider other factors before utilizing this strategy, such as whether the gift may negatively affect a child’s financial aid or education tax credit eligibility or an elderly person’s Social Security taxation.
It is important to remember that once given, the gift is considered irrevocable and may affect your eligibility for Medicaid.
A financial planning professional, along with qualified tax and legal advisers and a licensed insurance agent, can provide you with some ideas and suggestions for you to consider, based on your goals and financial situation.
FPA member Amy Jo Lauber, CFP®, is president of Lauber Financial Planning in Buffalo, NY.