By FPA member Matthew A. Lasker, CFP®
Last Updated: October 17, 2011
Many individuals identify transferring wealth to the next generation as a primary estate planning goal.
One of the simplest ways to achieve this goal is by utilizing a gifting strategy that qualifies for the annual exclusion.
By making outright gifts to their children each year, individuals may remove any future appreciation of the gifted property from their gross estate, effectively reducing the size of their estate for estate tax purposes.
Any individual may make gifts of cash or property, up to the annual exclusion amount, to any person each year. In 2011, the annual exclusion amount is $13,000. The annual exclusion is indexed to the Consumer Price Index (CPI) and periodically adjusted upward to keep pace with inflation. The annual exclusion is not cumulative and expires at the end of each calendar year.
In order to qualify for the annual exclusion, a gift must be of a present interest (defined as an unrestricted right to the immediate use of property). If the gift is of a future interest (defined as an interest that is limited in any way by a future date or time), it will not qualify for the exclusion and may be subject to gift tax.
For example: Gail transfers cash in the amount of $13,000 to her son. This is the only gift that she makes to her son this year. Because he has immediate, unrestricted use of that property, the gift is of a present interest and will qualify for the annual exclusion. Gail will not owe any gift tax and will not be required to file a gift tax return.
Gail also makes a gift of mutual fund shares with a fair market value of $20,000 to a trust with a beneficial interest to her niece. This is the only gift that she makes to her niece this year. Because her niece does not have immediate, unrestricted use of the property, the gift is of a future interest and does not qualify for the annual exclusion. She will owe gift tax on this gift and will be required to file a gift tax return.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 allows individuals a lifetime gift exemption of $5,000,000 and a corresponding gift tax credit of $1,730,800 through 2012. Any gift tax incurred on lifetime gifts that exceeds the annual exclusion amount each year is offset by the lifetime credit.
Making annual gifts to one’s children is a simple, effective way to transfer wealth to the next generation, while also decreasing the size of one’s future taxable estate during the donor’s lifetime. Please consult your financial adviser or estate planning attorney regarding various gifting strategies.
FPA member Matthew A. Lasker, CFP®, is a Client Counselor with Wingate Financial Group in Lexington, Mass.