‘Tis The Season for Giving. Important Information about Gift Tax

 

By: Rudman Winchell Attorney Tracy J. Roberts

People often worry about incurring gift taxes when making significant gifts to family members. However, most gifts are non-taxable, and under current federal law, people can gift up to $5 million during their lifetimes without incurring gift tax. By making non-taxable gifts, you may reduce estate taxes, by removing property from your taxable estate, including any future appreciation in the value of that property.

Marital deduction gifts: You may make unlimited outright gifts to your spouse, without incurring any gift tax, if your spouse is a U.S. citizen. For gifts to a spouse who is not a U.S. citizen, there is a special annual exclusion amount.

Annual exclusion gifts: There is no gift tax for the first $13,000 of property you give to any individual each year. The exclusion amount includes all gifts during the year, such as holiday gifts and birthday gifts. The exclusion amount applies to each donor and each donee. For example, a husband and wife with two children can give their children a total of $52,000 each year. You are not required to file a gift tax return in a year when your gifts do not exceed the exclusion amount.

Medical and educational expenses: In addition to the annual exclusion, there is an unlimited exclusion from gift tax for payments you make for another person’s tuition or medical care, including health insurance premiums. Your payment must be made directly to the educational institution or medical care provider or insurance company. The exclusion is not available if you reimburse someone else for these expenses. The education exclusion applies only to tuition payment, not to room and board, books, or other supplies, and does not apply to amounts that are reimbursed by insurance.

Gifts to Minors:Gifts to minors usually involve transfers to a responsible adult or a financial institution who will act in a fiduciary capacity to hold and manage the property until the minor reaches the age of majority or some later time. The two common methods for making gifts to minors that will qualify for the annual gift tax exclusion include custodianship under the Uniform Transfer to Minors Act and 2503(C) trusts. Additionally, Section 529 Plans provide favorable income tax treatment for state-sponsored college savings accounts, established to pay “qualified higher education expenses” for a designated beneficiary. Unlike trusts and custodial accounts, section 529 plans allow the donor to maintain control of the account and even transfer the account to another beneficiary. Contributions to these accounts qualify for the $13,000 annual gift tax exclusion.

For more information regarding 2503(c) trusts see: http://salsa.bbh.com/news/archives/003327.php?insurance=1

This article is intended to provide information of a general nature only and does not replace or provide professional legal advice. Any federal tax advice in this memorandum is not intended to be used and cannot be used by any tax payer for the purpose of avoiding any tax-related penalties. We would welcome the opportunity to meet with you to discuss your personal legal needs.