The Advantages of Lifetime Gifts

While most people expect to distribute assets to heirs after their death, an effective estate planning strategy is to maximize the use of gifts during your lifetime.

It is important to understand the tax laws regarding gifts. Under the unlimited marital deduction, you can give any amount of your estate to your spouse without paying gift taxes. However, when making gifts to other people, including your children, two limits are set on nontaxable gifts:

1. You cannot give more than $11,000 per year ($22,000 for married couples) to each of an unlimited number of individuals tax-free. An important exception to this rule is that you can make unlimited payments for medical and educational expenses for other individuals, as long as the payments are made directly to a health care provider or educational institution.

2. The total amount of gifts made during your lifetime, as well as the assets given by your estate upon death, cannot exceed the lifetime estate and gift tax exclusion amount of $1 million for single individuals and $2 million for married couples ($1.5 million and $3 million respectively in 2004-2005). The annual individual gifts of up to $11,000 are protected from tax by the gift tax annual exclusion.

Some tips to remember when considering lifetime gifts include:

* Over a number of years, an annual gift giving program can remove a substantial amount of assets from your estate. You can make gifts to any number of individuals, even those who are not related to you.

* You do not need to wait until your death to use your lifetime estate and gift tax exclusion. The major advantage of using your exclusion to make gifts during your lifetime is that any income, increase in value or capital gains that would accrue on the assets after the transfer are also removed from your taxable estate.

* If you have a choice, gift property that has the potential to appreciate in value, but has not already done so. When your heirs receive an asset after your death, the tax basis of the property is stepped up to the market value at the date of your death. The tax basis for a lifetime gift, however, remains your original cost basis, triggering capital gains on the eventual sale of the asset.

* You may also want to consider making taxable gifts in excess of your applicable exclusion amount during your lifetime. If you live at least three years after making the gift, any gift tax paid is also removed from your estate, generally meaning that your heirs will receive more assets. When a gift is made during your lifetime, the gift tax is only paid on the value of the gift. In contrast, after your death, estate taxes are paid on the total value of your estate, including the part of the estate that will be used to pay the estate tax. The cost of making lifetime gifts, therefore, can be substantially lower than the cost of leaving an asset on your death.

* Business owners should consider lifetime gifts to transfer business interests. Transfers of non-controlling interests during your life may allow you to assign minority interest and lack of marketability discounts to the value, resulting in lower gift taxes.

Lifetime gifts can be an effective estate planning strategy. Please contact us if you would like to discuss this with us in more detail.

NOTE: This information is designed to provide a general overview with regard to the subject matter covered and is not state-specific. The authors, publisher and host are not providing legal, accounting or any other advice which purports to be specific to your situation. The contents of this website are believed to be completely reliable. Nevertheless, some material may be affected by changes in the laws or interpretations of such changes since the material was entered on the website. If legal advice or other expert guidance is required, the services of a competent professional in the field of law, accounting, insurance or investments should be sought.

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