Annual Gift Tax Exclusion

A great way to reduce your estate tax exposure

What Is It and How Does It Reduce Your Tax Exposure?
The gift tax annual exclusion is a great way to reduce your estate taxes while keeping your assets within your family. It allows every individual to give away a specified amount of money to an unlimited number of persons without any gift or estate tax consequences. In 2010 and 2011, the amount of the annual exclusion is $13,000 (indexed in future years).

By making annual gifts to children or grandchildren, or to a trust in their name, you can reduce your future exposure to estate taxes in two ways:

• You eliminate assets from your estate.
• You eliminate the possibility that these assets will appreciate as part of your taxable estate.

Not sure you want to gift thousands of dollars into the hands of minors? You can gift to a child through a Uniform Transfers to Minors Act (UTMA) account. Under these accounts, the minor is considered to be the owner of gifted property from the outset, but it is held, managed, and distributed by a custodian. When the minor reaches the age of majority as set by law (18-21, depending on the state), the property passes to the beneficiary outright.

Beware: A parent or grandparent who has gifted the funds to the UTMA account should not be named as the custodian, as the account will be included in the donor's estate should the donor name himself or herself as custodian and die while maintaining control over the account.

Trusts can be used in a similar way to provide gifts without giving underage children control of valuable assets. Talk to your estate-planning professional to find out about these arrangements.

In 2010, under current law, the lifetime gift tax exclusion is not equal to the estate tax exclusion. Gifts that do not qualify for the annual exclusion amount currently 13,000 in 2010 and 2011, are considered taxable gifts. The lifetime gift tax applicable exclusion amount allows a taxpayer to gift up to $1 million, over his or her lifetime, free of federal gift taxes. The estate tax applicable exclusion amount, currently scheduled to return in 2011, will be reduced by the gift tax applicable exclusion used.

Beware: These are combined transactions. For example, if an individual dies in 2011 after making $1,000,000 of taxable gifts during his or her life, under current law, no assets can be excluded from estate taxes at death. Since the estate tax exclusion is scheduled to be $1,000,000 again in 2011, under current law, the applicable exclusion amount is first applied to lifetime gifts, then to transfers at death.

Why You May Want to Start Gifting Today.
You may want to start gifting today to potentially reduce your future exposure to estate taxes. By gifting sooner, you remove the assets and future appreciation and income from your estate.