Tax Planning: Minimizing the Estate Tax by Lifetime Gifting

The annual gift tax exclusion currently permits each person to make unlimited transfers of $13,000 per recipient per year.  Spouses may make gifts of $26,000 using each spouses exclusion of $13,000.  So, for example, if a married couple has five children and each child has a spouse, the couple could transfer $260,000 in gifts (5 children + 5 spouses = $13,000 x 10 recipients = $130,000 for each child and spouse = $260,000).

     Gifts to meet educational and medical costs are excluded from the gift tax laws, and are popular with wealthy families because the amounts are not limited in amount and are excluded from the donor’s estate.  So, for example, a grandparent may pay 4 years of college tuition, large long term medical expenses or health insurance premiums which exceed the gift tax limits and which are excluded from the donor’s estate for estate tax purposes.  

     If a donor makes any gifts greater than the annual exclusion for that year, a gift tax return must be filed by April 15, of the year following the gift.

     There are advantages and disadvantages of lifetime giving.  The future is unknown and unpredictable;gifts may be used in ways that are improvident or displeasing to the donor; long term nursing care is expensive and transfers may disqualify a donor from receiving care for a period of time depending on the amount of the transfer and when the transfer is made in relation to the time when care is needed.

     Because current federal tax law ‘unifies’ gift and estate taxes, wealthy people gift have a short opportunity to make tax free gifts of $5 million until the law reverts on 01/01.2013.