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 - and one that everyone should at least give careful consideration to - is a program of giving gifts. Even though the massive Economic Growth and Tax Relief Reconciliation Act of 2001 has changes a substantial part of the entire gift and estate tax law over the next 10 years, making lifetime gifts can still be useful. A carefully planned gift-giving program can reduce the 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. Even with the maximum estate tax rates being phased down from as high as 55 percent starting in 2002, down to 45% by 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 many gifts are subject to gift taxation, you can give away up to $10,000 per recipient per year free of gift tax. (Beginning after 1998, this $10,000 amount was supposed to be indexed for inflation, but since it may rise only in $1,000 increments, the annual gift tax exclusion remains at $10,000 for 2001 and 2002.). These gifts also do not reduce the amount that you can pass free of estate tax. There is a great deal of flexibility in the types of property that can be transferred. Qualifying gifts can be 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 can give up to $20,000 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 as long as the payments are made directly to the medical services provider or educational institution. The medical expenses must not be reimbursed by insurance. One word of caution: if you pay medical or educational expenses for a grandchild, the child's parents may realize taxable income if the parents are obligated by law to pay these expenses.

        If used properly, 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.

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