Gift Tax Annual Exclusion
The gift tax annual exclusion helps reduce the size of the estate of the donor-the person making the gift-reducing taxes and potentially other costs associated with transferring estate assets. Each individual may give up to $12,000 per year to as many people as he or she wishes, free of federal gift tax. (The $12,000 amount applies in 2008, and is indexed for later years.) Lionel has two children and they are both married. He also has two adult nephews who are not married. Lionel may give $12,000 to each of his children, to each of their spouses, and also to both nephews, reducing his gross estate by $72,000. He could repeat these gifts next year. And, he may also give up to $12,000 each to as many other people as he chooses, free of federal gift tax. To secure the gift tax annual exclusion, the gifts must be of a "present interest," which means the recipient must have the right to enjoy the property immediately after the gift is made. The exclusion is invalidated if any conditions are attached that: - Delay use of the property to the future, or
- Require the recipient to get anyone else's agreement in order to exercise the right to use the property.
This present interest rule does not apply in the case of a Section 2503(c) trust for a minor child. Even though this technically represents a "future interest," the exclusion is allowed. A transfer of property is considered a gift only when it has these three characteristics: - Gratuitous, which means the transfer must not provide the donor with any fair value in return because this would be considered a sale, not a gift. For example, if the donor sells an antique auto worth $30,000 to his niece for $20,000, the donor is considered to have made a $10,000 gift. The remaining $20,000 represents a sale, not a gift.
- Complete which means the donor does not retain any control over the property. The donor must not retain possession of the gift or retain any power to revoke the gift.
- Voluntary, which means the transfer of property must not result from any legal requirement. For example, a trust required for a child by a divorce court as part of the marriage dissolution is not a gift because its establishment was required, not voluntary.
- An even greater reduction in the value of an estate can be accomplished through gift-splitting and increasing the total annual excluded gift tax amount. Gift-splitting is available only to married couples, and regardless of which person actually owns the property being gifted, both spouses can join in the gift for tax purposes.
For example, in 2008, the wife and husband may each give up to $12,000 to as many individuals as they choose. Suppose they want to give gifts to a daughter and her husband, to an unmarried adult son, and to an unmarried adult cousin. Together, they may give $24,000 to the daughter, $24,000 to the daughter's husband, $24,000 to the son, and $24,000 to the cousin, thus reducing the gross estate by $96,000 in 2008. If left in the estate, this $96,000 could be subject to federal estate tax at rates up to 45 percent (if death occurred in 2008). |
