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Avoid Estate Taxes by Giving-it-Away
Staff Reporters
A doctor may transfer up to $12,000 a year as a tax-free gift to another person. This also applies to gifts of present interests, which includes gifts (if they satisfy the rules of Section 2503 (c) of the Code) to trusts. If the doctor or other donor is married and the spouse consents to join in the gift, the tax-free exclusion is $24,000.
Gifting Limits
The annual tax-free transfer may not seem significant, to some, but there is no limit to the number of donees eligible for such gifts each year. If the gift program is started early and continued every year, it can result in substantial savings.
Example—A physician or other couple with three married children and three grandchildren can utilize the annual exclusion to gift up to [9 X $24,000] = $216,000 tax-free. If they consistently do this for twenty years, the tax-free transfer amount is $4.32 million. Had they not made such life transfers, the federal estate tax on this amount could deprive the family of several million dollars.
In making joint gifts, a gift tax return, Form 709, must be filed to indicate the non-owner spouse’s consent. If each spouse gives his or her separate property and no gift exceeds the annual exclusion, no gift-tax return is required.
The current $12,000 exclusion amount is indexed in $1,000 increments periodically for inflation.
Direct Gifts for Medical or Educational Purposes
There is no dollar limit on the amount a person can give each year for the benefit of another person’s medical care or education. However, the gift must be made directly to the medical or education provider (such as a hospital or college).
“Education” includes not only higher education, but also primary and secondary schooling as well (for example, prep school). These direct gifts can be made in addition to the annual gift amount specified above. This is especially useful for educational gifts since most high net worth individuals have medical coverage.
Like the annual exclusion, there is no family relationship requirement for making the gift.
Gifts to Qualified State Tuition Plans
Many states, like New York, now offer qualified tuition plans that allow tax-advantaged savings for higher education. These plans are fashioned like an IRA. The earnings on the contributions are not taxed annually but become taxable and are subject to penalties when withdrawn for non-qualified education expenses.
In addition, special gift-tax rules offer additional tax-saving opportunities. From a gift-tax perspective, the contributions are treated as present-interest gifts and qualify for the annual gift-tax exclusion. There is a special election that contributors can make which allows the gift to be treated as having been made repeatedly over five years.
Gifts up to the Exemption Amount
Even if gifts exceed the tax-free transfer limits, there may still not be current gift-tax cost to donors. Each person can give away up to the estate tax exemption amount which increased from $2 million to $3.5 million between 2006 and 2009.Of course, to the extent that the exemption amount is used to shelter lifetime transfers, it is not available to the donor’s estate.
Assessment
However, using the full exemption amount during life yields an important advantage. The appreciation on the amount transferred is also removed from the donor’s estate.
Conclusion
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