While many gifts are subject to gift
taxation, you can give away up to $10,000 per recipient
per year free of gift tax. 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 investments, 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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