Gift-Giving: You Can’t Take It With You

By Caryn M. Feldman, CPA, MST

Most people do not like to think about estate planning. However, it is vital to ensuring that your loved ones will be taken care of in the event of death. A common estate planning tool to consider is a program of giving gifts. Even though the future of the estate and gift tax law remains uncertain with the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, making lifetime gifts can still be an effective means of reducing your taxable estate while passing on wealth to the next generation.

Gifting can also serve as an effective means of lowering your income taxes as well by shifting income-producing or appreciated property to those who are presumably in a lower tax bracket.

What is the gift tax? The gift tax applies to the transfer of property by gift, from a donor to a donee. Gifts can be made in the form of real property, personal property, tangible or intangible property. Gifts, however, cannot be made in the form of donated services.

It is important to be aware that you are given a unified credit against the gift and estate tax. The lifetime exemption from gift tax is fixed at $1,000,000, which means that your cumulative lifetime gifts above that amount are subject to tax under the same rate schedules as the estate tax until 2010 (in 2011, the rate reverts back to a top rate of 55%). For estate tax purposes, the applicable exclusion amount is set at $1,500,000 for 2004 and is scheduled to increase gradually to $3,500,000 in 2009.

You can give away up to $11,000 per recipient per year free of gift tax. In order to qualify for the $11,000 annual exclusion, a gift must be a gift of a present interest. A present interest in property is an unrestricted right of the donee to the immediate use, possession, or enjoyment of property or income from the property. Present interest gifts up to $11,000 annually per donee will not reduce your $1,000,000 lifetime exemption.

One important thing to remember when you make a gift is that the recipient must take your basis in the gifted property. That means that if the recipient later sells the property, any gain on the sale will be measured using what you paid for the property, not what the property was worth on the date it was gifted. In contrast, when property is transferred to another through your estate, your beneficiary’s basis in the transferred property will be the fair market value of the property on the date of death. Therefore, choosing the right property to gift to achieve your goals is an important aspect of gift-giving.

Another way to achieve your wealth transfer goals without incurring gift tax is by payment of medical and educational expenses. You can pay an unlimited amount of these expenses tax free as long as the payments are made directly to the medical service provider or educational institution.

In sum, a gift program should be designed with your overall objectives and strategies in mind. If used properly, a program of gift-giving can benefit everyone involved. Various types of gifts should be made in a coordinated fashion bearing in mind your goals, the annual exclusion and your exemption equivalent.

Caryn M. Feldman, CPA, MST is a tax manager at Walter & Shuffain P.C. located in Norwood, MA. To find our more information regarding gift-giving and other estate planning techniques, please call Caryn at (781)769-5300 or email her at cfeldman@wscpa.com .