FAQ: Gifting

Gifting To Reduce Your Taxable Estate Information

• My financial advisor has suggested the use of gifting in order to reduce my taxable estate. Will this technique serve that purpose?
• What is the annual gift tax exclusion, and how does it work?
• Can my husband and I combine our gifts in order to increase our annual exclusions?
• Are there other types of tax-free gifts that I can make in addition to annual exclusion gifts?
• Can I use my annual gift tax exclusion to make gifts in trust?
• What if my gifts to a family member exceed the annual exclusion in a given year?
• Are gift tax rates higher or lower than estate tax rates?
• How much can I give my spouse without paying a gift tax?
• When is a gift “complete” for federal gift tax?
• How do I value gifts for federal gift tax purposes?
• Who pays the gift tax: the donor or the recipient?

My financial advisor has suggested the use of gifting in order to reduce my taxable estate. Will this technique serve that purpose?

Yes, it can work quite well. Gifts can be made annually if desired, and both spouses can engage in this activity.

What is the annual gift tax exclusion, and how does it work?

The federal gift tax law provides for an annual gift tax exclusion which allows individuals to give away tax free a certain amount per year per person to as many persons as they wish. This annual gift tax exclusion was $10,000 for many years. The Taxpayer Relief Act of 1997 provides that the annual exclusion will be indexed for inflation beginning in 1999. The annual exclusion will be increased by the amount of annual inflation but only in minimum increments of $1,000, rounded down to the nearest $1,000. The exclusion in 2021 is $15,000.

Can my husband and I combine our gifts in order to increase our annual exclusions?

Yes, married individuals can each use their annual exclusions. For example, if you are married and have children, you and your spouse can together give each child up to $22,000 each year (as of 2003). It does not matter from whose assets a gift is made. For example, if you give one child money or property that exceeds the annual exclusion and your husband consents to split the gift on a federal gift tax return, then both of your annual exclusions can be applied to the value of the gifts.

Are there other types of tax-free gifts that I can make in addition to annual exclusion gifts?

Yes. Payments of any amount for school tuition and medical expenses that are made directly to the school or medical provider are tax-free and are in addition to the annual exclusion.

Can I use my annual gift tax exclusion to make gifts in trust?

Yes, though such gifts must be what are called gifts of a “present interest.” That means that the beneficiary of the trust must be able to use the gifted property presently, not just in the future. Methods are available to convert gifts of a “future interest” to gifts of a “present interest.”

What if my gifts to a family member exceed the annual exclusion in a given year?

Let’s say that an individual gives $50,000 to one person in one year and let’s assume that the annual exclusion, after indexing for inflation, is $11,000. The first $11,000 is free of the gift tax and the remaining $39,000 is gift-taxable. That does not mean that the donor must actually pay the tax, however, because a like amount of Unified Credit can be used to offset the tax liability (assuming the donor has not previously consumed the available Unified Credit). The donor is responsible for filing a U.S. Gift Tax Return by April 15 of the year following the year of the taxable gift.

Are gift tax rates higher or lower than estate tax rates?

They are exactly the same; that is the essence of the unified transfer system existing in the U.S.

How much can I give my spouse without paying a gift tax?

That depends on whether the spouse is a U.S. citizen. If the spouse is a U.S. citizen, the donor can give unlimited amounts at any time. This is because the unlimited marital deduction applies to such gifts. If, on the other hand, the spouse is not a U.S. citizen, annual tax-free gifting to such a spouse is limited to $100,000.

When is a gift “complete” for federal gift tax?

A gift is complete when the donor gives up complete dominion and control over the property and when the donor intends that a gift be made.

How do I value gifts for federal gift tax purposes?

For gift tax purposes, you must value a gift at its fair market value as of the date the gift is transferred to the recipient. The same standards for valuing an asset in an estate apply to valuing a gift.

Who pays the gift tax: the donor or the recipient?

The donor is responsible for filing a gift tax return and paying the tax. If the donor does not pay the tax, payment becomes the responsibility of the recipient. If the recipient does not, or cannot, pay the tax, the property will be used to pay the tax.