| Estate & Gift Tax / The gift tax annual exclusion |  |
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As illustrated below, taxpayers can
transfer substantial amounts free of gift taxes to their children or
other donees through the proper use of this exclusion. The amount of the exclusion for 2001
is $10,000. Although the statutory exclusion amount ($10,000) is
adjusted for inflation annually (using 1997 as the base year), the
exclusion amount must be rounded to the next lowest multiple of $1,000.
Thus, the $10,000 amount won't increase to $11,000 until the adjustment
for post-1997 inflation is at least 10%. Therefore, the illustrations I
use in this letter assume that the amount of the gift tax annual
exclusion is $10,000. The exclusion covers gifts an
individual makes to each donee each year. Thus, a taxpayer with
three children can transfer a total of $30,000 to them every year free
of federal gift taxes. If the only gifts made during a year are excluded
in this fashion, there is no need to file a federal gift tax return. If
annual gifts exceed $10,000, the exclusion covers the first $10,000 and
only the excess is "taxable". Further, even
"taxable" gifts may result in no gift tax liability thanks to
the unified credit (discussed below). (Note, this discussion is not
relevant to gifts made by a donor to his spouse because these gifts are
gift tax-free under separate marital deduction rules.) Gift-splitting by married taxpayers. If the donor of the gift is married, gifts to donees made
during a year can be treated as "split" between the husband
and wife, even if the cash or gift property is actually given to a donee
by only one of them. By gift-splitting, therefore, up to $20,000 a year
can be transferred to each donee by a married couple because their two
annual exclusions are available. Thus, for example, a married couple
with three married children can transfer a total of $120,000 each year
to their children and the children's spouses ($20,000 for each of six
donees). Where gift-splitting is involved,
both spouses must "consent" to it. Consent should be indicated
on the gift tax return (or returns) the spouses file. IRS prefers that
both spouses indicate their consent on each return filed. (Because more
than $10,000 is being transferred by a spouse, a gift tax return (or
returns) will have to be filed, even if the $20,000 exclusion covers
total gifts. Please contact me regarding the preparation of a gift tax
return (or returns), if more than $10,000 is being given to a single
donee in any year.) The "present interest"
requirement. For a gift to qualify for the annual exclusion, it must be a
gift of a "present interest". That is, the donee's enjoyment
of the gift can't be postponed into the future. For example, if you put
cash into a trust and provide that donee A is to receive the income from
it while he's alive and donee B is to receive the principal at A's
death, B's interest is a "future" interest. Special valuation
tables are consulted to determine the value of the separate interests
you set up for each donee. The gift of the income interest qualifies for
the annual exclusion because enjoyment of it is not deferred, so the
first $10,000 of its total value will not be taxed. However, the gift of
the other interest (called a "remainder" interest) is a
"taxable" gift in its entirety. Exception to present interest rule.
If the donee of a gift is a minor and the terms of the trust provide
that the income and property may be spent by or for the minor before he
reaches age 21, and that any amount left is to go to the minor at age
21, then the annual exclusion is available (that is, the present
interest rule will not apply). These arrangements (called Code Sec.
2503(c) gifts because of the section in the tax code that permits them)
allow parents to set assets aside for future distribution to their
children while taking advantage of the annual exclusion in the year the
trust is set up. "Unified" credit for taxable gifts. Even gifts that are not covered by the exclusion and that are thus "taxable" may not result in a tax liability. This is so because a tax credit wipes out the federal gift tax liability on the first $675,000 of taxable gifts you make in your lifetime. (The $675,000 amount, which applies in 2001, is scheduled to increase to $1 million by 2006.) This credit, however, applies for both gift and estate tax purposes (that's why it's called "unified"). Thus, to the extent you use it against a gift tax liability, it is reduced (or eliminated) for use against the federal estate tax at your death. |
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