Warren Buffett’s record shattering gift has raised the level of awareness people have with respect to gifting as part of a person’s estate plan. Apparently in response to this waive of interest Forbes just published an article entitled Reduce Estate Tax By Making Gifts, which did a pretty good job of summarizing how gifting can fit into a person’s estate plan. The following are excerpts from the linked-to article:
While the estate tax is still in effect–or if Congress resurrects it after it goes away as scheduled in 2010–you may want to take steps to reduce possible estate tax liability at your death. One way to avoid estate taxes is to give away property during your life. This provides you with more than just tax savings; you also get to see the recipients enjoy your gifts.
Currently, you can make an unlimited number of $12,000 gifts of cash or other property each year, completely tax-free. To ensure these tax savings, you need remember only that no individual recipient can receive more than $12,000 in a calendar year. If you left the same gifts at your death and they were subject to estate taxes, the recipients would see their gifts shrink by at least 39%.
How the Annual Exclusion Works
The $12,000 annual tax exemption rule (called the "annual exclusion") is pretty straightforward. For instance, if you give $25,000 to someone, $12,000 of it is exempt from the gift tax. The remaining $13,000 is not. A few more examples:
–You give $8,000 to a cousin in one year. There are no federal gift-tax consequences.
–You give $16,000 to your grandson in one year. $4,000 is subject to the gift tax.
–You give $8,000 each to your two children in one year: None of that $16,000 is subject to the gift tax.
The exclusion amount is indexed for inflation; it rises, in $1,000 increments, as the cost of living does.
Couples: Double Your Exclusion
Married couples can combine their annual exclusions, meaning that they can give away $24,000 worth of property tax-free, per year, per recipient. In fact, even if only one spouse makes a gift, it’s considered to have been made by both spouses if they both consent. (Internal Revenue Code § 2513.) If you and your spouse give to another couple, you can transfer up to $48,000 tax-free each year.
Gifts To Your Spouse
All gifts you make to your spouse are tax-free, as long as he or she is a U.S. citizen. If your spouse isn’t a citizen, the limit on tax-free gifts is currently $120,000 per year. (IRC § 2523[a].) However, there’s seldom a reason to make large gifts to your spouse. If you each own about the same amount of property, you could worsen your tax situation by saddling your spouse with an estate that’s so large it will be taxed at his or her death.