Gifting Strategies

Introduction - The Gift Tax

It may seem easy to avoid estate tax. Why not simply give away everything you own right before you die (or give it to your spouse and have him or her give it away before he or she dies)? Well, the government is one step ahead of you. There are also taxes to pay when making gifts. In fact, these taxes are part of the same tax, called the Transfer Tax. In essence, the government will try to tax you every time you transfer an asset to someone, no matter whether you are alive or dead at the time.

The gift tax is a tax on the fair market value of assets transferred as gifts. Payments for services or support (paying for food, clothing, shelter, toys, court-ordered child support payments, etc.) for your children you are responsible for are not considered gifts. For lifetime transfers; i.e., gifts, there is an applicable credit amount which allows you to transfer a certain amount of assets during your lifetime free of gift tax. The amount of assets you can transfer is known as the applicable gift tax exclusion amount and is fixed under current law at $1,000,000. There are also gift tax exclusions that we will discuss later. The gift tax rates are the same as the estate tax rates.

CAUTION: The IRS uses a very broad definition of a gift for tax purposes. If you sell an asset to someone below fair market value (if the discount is over $12,000), forgive a loan over $12,000, fail to charge interest on a very large loan or give someone an interest in an asset you own, you have made a gift if you did so for a non-business reason. Before making a transfer of this nature, call your professional advisor.

You first use your applicable credit to avoid tax on taxable gifts. If you made taxable gifts during your lifetime, then you may have to pay estate taxes even though your estate is less than the exclusion amount. The reason for this is that taxable gifts are added back to your taxable estate to determine the estate tax.