Methods of Giving

November 16, 2011

Authored by: Stacie J. Rottenstreich and Karin Barkhorn

As we approach Thanksgiving and the holiday season many of us turn our thoughts to gift giving to family and loved ones. The Federal gift tax system allows us some opportunities to do such “gifting” in a tax free manner. A few states impose independent state gift taxes, so an expert in your state should be consulted before considering any of these gifting transactions.
Each individual has a total of $5,000,000 he can give away during his lifetime before owing any gift tax. However, there are several gifting opportunities which do not count as part of your $5,000,000 lifetime total. It is as if the Federal tax law has deemed them non gifts. Present interest gifts of $13,000 in 2011 and 2012 to any number of recipients are not subject to gift tax. Present interests means that the recipient of the gift has an unrestricted right to use or enjoy the gift immediately. For example, a married couple can give away $26,000 in cash or stock or other property valued at $26,000 to each of their children, in law children and grandchildren this year without using any of their combined $10,000,000 lifetime exemption.

There are even some techniques where the gift can be made to a trust. If the trust is structured in an appropriate manner, the trust beneficiaries will be deemed to have a present interest. You can make gifts to your minor children and grandchildren by transferring funds to a Uniform Gifts to Minors Act (UGMA) or a Uniform Transfers to Minors (UTMA) account in such minor’s name. You will then need to choose a custodian to handle the account for such minor.
Other gifts which are not subject to gift tax include gifts to charity, gifts to spouse who is a United States citizen and gifts for medical or educational expenses. In order to make a gift of medical expenses, the medical payments must be paid directly to the person providing the care. Similarly, in order to make a gift of educational expenses, you must make a payment directly to the educational institution for tuition only.
Payments to state 529 plans can be an effective way to make a gift. Contributions to 529 plans qualify for the annual gift tax exclusion, currently $13,000. Furthermore, you can make a gift to a 529 plan in one year of up to five year’s worth of exclusion. In other words, you can contribute $65,000 per beneficiary in one year without utilizing any of your $5,000,000 lifetime exclusion amount. The caveat to this is you can not make another gift to the same person for four more years. Furthermore, you may be eligible for a state income tax deduction for some of your contribution.
Aside from benevolent generosity, there are advantages to making gifts during lifetime. First and foremost is that not only are you moving the gift out of your future estate, but you are removing the future appreciation on the asset from your estate. You may save income taxes, as the tax on any income generated from the assets transferred will be the liability of the recipient going forward. If you give property that has a very low tax basis, for instance real property that has depreciated below its fair market value, stock with a very low basis or property that generates significant taxable income, you may reduce income taxes paid within a family unit by shifting or transferring these assets to family members in lower tax brackets. This is particularly true for gifts to minors who have little other income and low income tax brackets. Finally, giving family members assets during your life allows you to monitor their ability to handle future inheritances, to see the benefit of the gift and share the enjoyment of the recipients.