Gift Tax
What is a "gift tax"?
The federal government imposes a gift tax on certain transfers made between parties without consideration, without one party having given to the other payment for that property.
What are the current laws regarding gift tax exemptions?
There are several gift tax exemptions which are very important for our clients to know about. First of all, any gift between spouses is totally exempt from reporting. It is a non-event from the perspective of the gift tax law. In addition, gifts not in excess of $12,000 to a beneficiary, to a donee, in any particular year, is exempt from gift tax reporting. In addition, any gift made for the benefit of an individual to pay tuition or medical expenses, provided that the payment is made to the educational or medical institution, is not only exempt from gift tax but exempt from gift tax reporting. Any charitable gift is exempt from gift tax, is exempt from gift tax reporting. Any amount gifted at any time in excess or other than for these purposes is reportable as a gift, but no gift tax is due because there is a $1,000,000 exemption for gifts until that million dollars has been exhausted.
What is the appropriate way to document gift giving?
Gifts by definition are transfers. They're transfers of cash. They're transfers of property. Gifts may also be transfers of tangible personal property. For the first two you already have the paperwork. You have to sign a deed to real property and a transfer of cash in some documented manner, whether it is a check or whether it's a transfer of the name of the account to an individual. In such cases, the documentation suffices. The documentation for tangible personal property is more difficult because there is no transfer document typically, and you have to conjure up something if you're going to show those transfers as having been subject to written documentation. They don't have to be. The only thing that a gift donor should do is have whatever he or she is giving to the donee appraised so that the amount gifted can be ascertained and if that amount exceeds $12,000.00, or if it's spousal gifting $24,000.00 that it is reported on a gift tax return.
What are some ways a person might lessen their taxable estate?
Probably the most effective procedure to lessen taxable estate not involving deductions, exemptions, and the like is the gifting of property in a way that results in a discount in its valuation. There are a number of techniques to lessen taxable income but I'll just give you a couple of examples. If a person were to give away during their lifetime an interest in a piece of real estate. Instead of owning 100% the person now owns only 80% of that real estate. And that 80% of real estate is included in the person's estate providing taxable income. In addition to the fact that only 80% would be included, the reporting personal representative can claim a tax discount below the 80% because the amount that the estate or the successors of interest own is a fractional interest, and you can't sell a fractional interest. A house can be given away to the children subject to a 5 or 10 year period of residency by the owners of the house and the discount on the present value of the future gift can be very substantial indeed. With the result that the asset will be, if the person lives for the term of that trust, out of the estate completely for estate tax purposes.