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Planning to leave as generous an estate to your heirs requires great care, particularly when one realizes that the tax laws change continually. Estate planning can be a simpler task when a person understands the great benefit that the Gift Tax provides to a prudent planner.
The IRS defines a “gift” as the transfer of any property, including money, or the use of any property, to another person without any expectation of receiving something of at least equal value in return. This definition would include an “interest-free” loan.The tax rate on a gift will vary from year to year, having ranged recently between 35% and 55%. Tax rates at these levels can cost a great deal of money when the amount of gifts are in the thousands of dollars. The tax on a gift is paid by the one who gives the gift, not the one who receives it. Such gifts are not considered income for the recipient.
The gift tax can be avoided if each specific gift is valued at $13,000.00 or less. A person can give as many $13,000.00 gifts to as many people as he or she may wish within a calendar year, but not to the same person more than once. These gifts need not be explained or rationalized to the IRS, and they can be in any form a person chooses. Besides, money, a person can give jewelry, stocks, bonds, vehicles, artwork, or land as a gift, and all such forms of gifts will be treated exactly the same. Of course, non-monetary gifts will be subject to a valuation process, and it would be wise to have a recognized authority, such as an appraiser, provide an opinion as to the value of the gift.
The gift avoids the gift tax if it is under the exemption amount at the time of the giving. So, if stocks or art or land increase in value later, there will not be a requirement to pay the gift tax at any later date.
Multiple gifts can be given to the same person, as long as their total value does not exceed the limit. Spouses can give the full limit to the same person individually, for instance to a grandchild, without incurring any gift tax. Gifts to a specific individual are limited to a lifetime amount of one million dollars.
There are five exceptions to the definition of a gift under federal law. These exceptions are: gifts that come under the $13,000.00 limit; tuition or medical expenses paid on behalf of another; gifts to your spouse; gifts to a political organization for its use; and gifts to qualifying charities.
Gifts given to others reduce a person’s estate, and can be an effective way to limit the amount of an estate which will be paid in taxes after a person’s death. In 2012, the federal estate tax exemption is $5.12 Million. This is obviously a generous amount, but owners of small businesses, people with a large stock portfolio or those who own large tracts of land are among those people who might find themselves pushing against this limit.
By giving away money while you are alive, it is possible to reduce the size of your estate and keep in under the estate tax exemption. Gifts count against the estate tax exemption, but there still can be an advantage to gifting while you are alive. Such a benefit is particularly helpful if the assets given away are of a type that can appreciate, such as stocks. By giving up the assets before death, the appreciation in value of the gift does not end up in your estate, but in the receiver’s bank account.
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