Tax Tips
Annual Gift Tax Exclusion - June 2004
Richard Scrivanich - Partner
Did you know that the $11,000 annual gift tax exclusion can be one of the most effective techniques available for providing substantial long-term tax savings? You can use the exclusion to lower tax rates, to move assets out of a taxable estate on a discounted basis, and to remove future value from your estate.
Annual exclusion amount: Taxpayers may make annual gifts of up to $11,000 ($22,000 for married couples) per donee (recipient), with no limit on the number or relationship of donees. The gift must be of a “present interest in property,” which means an unrestricted right to immediately use or enjoy the property (or income from the property). Gifts covered by the annual exclusion do not reduce a donor’s lifetime unified tax credit.
Purposeful gifting: Sometimes a taxpayer is unwilling to make gifts because potential donees have not used money properly in the past or the taxpayer wishes to delay their access to the gift’s benefits. One way to accomplish this is to make annual exclusion gifts to minors under the Uniform Gifts to Minors Act. The donee’s parent will control the funds as the minor’s guardian until the child reaches age 18 or 21, depending on the state. Another alternative may be to use family limited partnerships or trusts to limit donee’s access to the funds for longer periods. Please consult our offices for help in properly taking advantage of these more complicated gift options.
Deathbed gifts: “Deathbed” annual exclusion gifts are a significant planning tool. However, if a donor dies before a gift check clears his or her account, the gift amount is includible in the donor’s estate. Note: A charitable deathbed check does not need to clear to be a valid gift. However, you will need to be sure that gifts made within three years of death do not come back into the donor’s estate for certain purposes.
Tuition and medical gifts: In addition to the annual exclusion, amounts paid on behalf of an individual for education, training, or medical care are not subject to gift tax. Thus, parents and grandparents can make gifts of tuition and medical costs for family members without reducing the annual exclusion or unified credit.
The payments should be made directly to the qualifying medical or educational provider. The tuition exclusion does not apply to amounts paid for room, board, books, or supplies. The medical expense exclusion does not apply to amounts reimbursed by insurance.
Unless the donee is the donor’s dependent, the donor will not be entitled to an income tax deduction for payment of medical expenses; however, these payments qualify for the gift tax exclusion without regard to the parties’ relationship. Caveat: Payment of these gifts by others could be taxable income to a parent who is obligated to provide such support.
Donors can also make gifts of prepaid tuition to certain qualified state tuition programs (QTPs). These gifts do not come under the medical or educational gift exclusion and would be covered by the annual exclusion or the unified credit. In addition, if a donor’s annual contributions to a QTP exceed the annual gift tax exclusion, he or she can elect to take the contributions into account ratably over five years.
Gift-splitting: A spouse may elect to be treated as the donor of a gift although the other spouse is the sole transferor. For gift-splitting to apply, the donor must file a gift tax return on which the spouse consents to treat gifts as made half by each. Gift-splitting, if elected, applies to all gifts made during the year, and not on a gift-by-gift basis.
Basis issues: In general, a donee takes the donor’s basis in any assets given. However, if the asset’s basis exceeds its fair market value (FMV) on the date of the gift, the donee must use the FMV to compute basis if the asset is later sold at a loss. In such a case, the donee only recognizes any loss beyond the asset’s FMV on the date of the gift.
Take action before year end: Leverage the gift tax exclusion by taking advantage of the fact that it is an annual exclusion. If you are considering gifts, plan to make them before December 31 to avoid missing the exclusion for 2004. Please call me if you would like to discuss the use of the exclusion or other gifting strategies at (562) 698-9891.
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