The wisdom of making a Will is well settled as sound legal advice, and rightly so. Less talked about, but equally advisable for many people, is the use of gifts during one’s lifetime as a method for estate planning. Apart from the intangible benefits that flow from the fact that, as the saying goes, it is more blessed to give than to receive, gifting has favorable down-to-earth, dollars-and-cents ramifications.
Gifts reduce the size of the donor’s estate that will be subject to court administration, thereby potentially simplifying the probate process and cutting costs and potential estate tax liability. Less obvious, but equally advantageous, is the way that gifts can provide savings on income taxes. This occurs when income-producing property is given by an individual in a high income tax bracket to someone in a lower tax bracket.
Gifts do not trigger income tax liability for the recipient. However, the original cost, or basis, of the gift remains for the recipient what it was for the donor. As a result, if the recipient later sells the property, he generally will owe capital gains tax on the difference between the donor’s basis and the sales price.
As for the gift tax, the starting point to consider is that the Federal Government levies the tax on transfers of real or personal property made during the giver’s lifetime where something of similar value is not received in return. For tax purposes, the dollar value of a gift is the fair market value of the property when it is given, less the fair market value of anything received in return. The donor is liable for any gift tax that is due, but if the donor does not pay the tax the donee becomes personally liable.
An annual exclusion of up to $13,000 is available for transfers to other persons without payment of the federal gift tax. Rather than pay the gift tax on gifts over $13,000, the donor can choose to apply the federal estate tax credit (as a result of congress’ action New Year’s Eve and New Year’s Day, estates up to $5 million are still exempt from federal estate tax). The donor does not need to file a federal gift tax return for gift amounts less than $13,000. Because the exclusion amount is per donee, any one donor actually can make gifts in a large total amount, without incurring a gift tax, by giving to many different recipients. For a married couple, i.e., two donors, the annual exclusion is $26,000 per donee.
There is an unlimited marital deduction provision in the federal gift tax law, so that no gift tax is due, and no return need be filed, for gifts between spouses in any amount. Also excluded from the gift tax are amounts paid by a donor to a qualified educational institution for another’s tuition, or to a health-care provider for someone’s medical services. Gifts to qualified charitable, religious, and educational entities, government agencies, and many organizations with tax-free status are not subject to the gift tax.
This article merely introduces the subject of the gifting of property. Estate planning techniques and tax laws are complex. You should always consult with a qualified attorney to assist you in such matters.
Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.