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The Online Advisor - July 1998
Lifetime gifts can cut your estate taxes.
If you expect to have a taxable estate, you might consider the benefits of an annual gift-giving program.
The tax code provides few "free rides," but the annual gift tax exclusion is one of them. A taxpayer can give or bequeath an amount (currently $625,000, but scheduled to gradually increase to $1 million) tax-free. This amount includes both lifetime gifts and post-mortem bequests. But annual gifts to a child, grandchild, or other donee of less than $10,000 per year are not counted towards this amount. In addition, if the donor is married and his/her spouse consents, up to $20,000 can be given to any donee annually.
Excluded gifts reduce federal taxes in two ways. (1) By removing assets from the taxable estate, they reduce future estate taxes, which can be substantial. (2) If the gift is an income-producing asset, giving it away lessens the donor’s income and thereby lowers current income taxes. And, depending on the owner’s state of residence, gifts might also reduce state inheritance and income taxes.
Gifts can be made with cash, but shares of stock and other assets will also qualify for the annual gift tax exclusion. Gifts, however, must be current. Promises of future gifts do not qualify.
One word of caution: This "free-ride" exclusion includes all gifts to a donee during the year. If you gave $100 to someone as a birthday or holiday present, and later in the same year gave that individual $10,000 as an annual gift, you would be over the limit. Therefore, you should restrict your annual gifts to amounts somewhat less than $10,000 to each donee so as to provide a "cushion" for other gifts made during the same year.