ESTATE STRATEGIES: 'Tis the season to be gifting

Editor's note: While Ryan Wilson is serving his country in Washington D.C., his column will be written by guest writers. By Marlaine C. Teahan Thanksgiving is here. Besides enjoying the turkey leftovers, many of us are busy counting our blessings. We wonder how to bless those who have blessed us. We ask, "What would be an appropriate gift?" "Should I get a present, give cash, or simply write a check?" If your next question is, "What are the tax ramifications of my gift?" then you must be a tax attorney. If that wasn't your next question, this Q&A summary of the federal gift tax law is for you. Caveat: Some believe the gift tax laws are among the most complicated in the Internal Revenue Code; accordingly, this column is intended as general educational information only and not legal advice. Q: What is a gift? A: Any transfer to an individual where less than fair market value is given in return. Q: What triggers the gift tax? A: Each person is entitled to make annual gifts with no tax consequences if the combined total of annual gifts is less than or equal to $13,000 per person per calendar year. If a gift exceeds these limits, a United States Gift (and Generation-Skipping Transfer) Tax Return, Form 709, must be filed. This is an informational return unless a person's lifetime gift tax exemption has been exceeded at which point gift tax must be paid. Q: How much can my spouse and I gift to our children this year without incurring any gift tax liability? A: This year, each spouse can give up to $13,000 to each child (or anyone else) without incurring any gift tax liability and without using up the lifetime gift tax exemption. In a family with two children, each spouse could give $13,000 to each child, for a total of $52,000 in tax-free gifts. Each spouse should write one check for $13,000 instead of a combined check for $26,000. If gifting with the annual exclusion amount in mind, be sure to add up ALL gifts given during the year. Before writing a $13,000 check for Christmas, consider all gifts made during the year (such as birthday and anniversary presents), and all payments made on behalf of your child (such as paying off credit card debt). Q: What if annual gifts exceed the tax-free amount? A: In addition to our annual gift tax exclusion amount of $13,000, in 2011 and 2012, we each have a $5,000,000 lifetime gift tax exemption. The amount of an annual gift that exceeds the $13,000 limit per person, uses up part of the lifetime gift tax exemption. This lifetime exemption amount is reduced dollar for dollar by the amount of gifts that exceed the annual gift tax exclusion. Each gift that reduces our lifetime gift tax exemption also correspondingly reduces the amount we can pass to others tax-free upon death. For 2011, the federal estate tax exemption amount is $5 million. For 2012, it has been indexed for inflation to $5,120,000; however, under current law, the exemption reverts in 2013 to $1 million indexed for inflation unless Congress passes legislation changing this amount. Q: What if I make gifts during life that exceed my $5,000,000 lifetime gift tax exemption? A: Gift taxes must be paid during life on gifts exceeding the $5,000,000 lifetime gift tax exemption amount. The current rate of tax is 35%. Q: Are there any exceptions to the gift tax rules? A: Yes there are many exceptions; specific advice should be obtained to handle such gifts correctly. Generally, paying another's tuition or medical expenses directly to the institution or care provider does not trigger gift tax rules. Gifts to spouses are also excluded from the gift tax rules; however, there are limitations for gifts to non-US citizen spouses. Gifts to charities have special rules as do gifts to fund Education Savings Plans (MESP or 529 Plans). Q: What is a split gift? A: A split gift allows a gift of property by one spouse to be attributed equally to both spouses; a gift tax return must be filed timely to indicate a split gift has been made. Q: What are some benefits of making annual gifts? A: Besides the joy of seeing loved ones enjoy your gift, there are several estate tax benefits using annual gift tax exclusion gifts. One of the most common reasons for annual exclusion gifts is to reduce one's estate to minimize federal estate taxes paid at death. Planning is needed to retain enough money for future expenses. Further, such plans should be made in consultation with your estate planning, tax, and accounting team. For advice regarding your situation, please consult with your attorney or tax advisor. Note that gifts to spouses and charities do not necessarily follow the rules discussed above. Gifts of closely-held entities, appreciated assets and within three years of death deserve special treatment. Finally, be aware that these rules change often. ---------------- Marlaine Teahan of Fraser, Trebilcock, Davis, & Dunlap PC is the contributing writer for this month's column. Published: Thu, Dec 1, 2011