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Currently, each of us can give $12,000 per year to as many individuals as we wish without gift tax consequences. These gifts can be made outright, or to a separate trust. This amount reflects a $1,000 increase over last year's allowable gift per person.
It is generally recommended that if the gifted assets are designed for the future uses of the targeted beneficiaries that you consider using a separate trust.
The Lifetime "Future Interest" Gift Allowance
Every U.S. citizen also has a one-time, lifetime exemption, which can be claimed (gifted) now or at death (technically, the exemption is a unified credit). Starting in 2002, each of us has a $1,000,000 exemption and this amount will slowly increase until 2010. After 2010, starting Jan. 1st, 2011, allowable exemptions will revert back to $1,000,000 each - unless Congress enacts an extension of the current laws.
Gift Tax Rates are the SAME as Estate Tax Rates
The federal gift tax rates are unified with the federal estate tax rate schedules as seen in the table below. This basically means that one COULD NOT give away everything on his or her deathbed without potentially paying large taxes.
| Amount in Question | Tentative Tax is |
|---|---|
| Not over 11,000 | 18% of that amount |
| Over 11,000, but not over 20,000 | 1,800+20% of excess over 10,000 |
| Over 20,000, but not over 40,000 | 3,800+22% of excess over 20,000 |
| Over 40,000, but not over 60,000 | 8,200+24% of excess over 40,000 |
| Over 60,000, but not over 80,000 | 13,000+26% of excess over 60,000 |
| Over 80,000, but not over 100,000 | 18,200+28% of excess over 80,000 |
| Over 100,000, but not over 150,000 | 23,800+30% of excess over 100,000 |
| Over 150,000, but not over 250,000 | 38,800+32% of excess over 150,000 |
| Over 250,000, but not over 500,000 | 70,800+34% of excess over 250,000 |
| Over 500,000, but not over 750,000 | 115,800+37% of excess over 500,000 |
| Over 750,000, but not over 1,000,000 | 248,300+39% of excess over 750,000 |
| Over 1,000,000, but not over 1,250,000 | 345,800+41% of excess over 1,000,000 |
| Over 1,250,000, but not over 1,500,000 | 448,300+43% of excess over 1,2500,000 |
| Over 1,500,000, but not over 2,000,000 | 555,800+45% of excess over 1,500,000 |
| Over 2,000,000, but not over 2,500,000 | 780,800+49% of excess over 2,000,000 |
| Over 2,500,000, but not over 3,000,000 | 1,025,800+50% of excess over 2,500,000 |
| Over 3,000,000 | 1,290,800 plus 55% of excess |
Estate assets exceeding $10,000,000 are subject to a 5% surcharge until the benefits of the applicable credit amount and the lower graduated tax brackets have been recaptured.
Gift Now, Save Later
Your annual gifting allowances can be used as an effective tool to reduce the estate value over time, and potentially avoid costly estate taxation.
For example, let's say you and your wife gift $10,000 annually over 10 years to your 3 children each. You have effectively removed $300,000 from your taxable estate, which may normally be subject to as high as 55% estate tax rate. What's more is that the growth on that $300,000 has occurred outside of your taxable estate.
In only 10 years, using a 10% tax deferred growth rate, this asset will have increased to over $500,000 in value. The end result was a potential saving of over $250,000.
How to Avoid Killing off Your Children's Incentive
Many parent and grandparents are understandably hesitant to make large or substantial gifts directly to children or grandchildren. They fear that these monies may be misused, not properly invested, or serve to kill off their heirs incentive to work hard, be thrifty and become a responsible and productive member of society.
As a result, it is generally recommended that the grantors combine their gifting allowances with an Irrevocable Trust. This approach often times enables the parents/ grandparents to effectively maximize their wealth transfer objectives, benefits and control.
Complimenting Your Gifting Efforts
Because tax rates rapidly reach as high as 39.6% on investment earnings held by Irrevocable Gift Trusts (earnings of only $7,900), it is generally recommended that one take great care in selecting the type of investment(s) to be held.
To that end, both Tax Efficient Mutual Funds and Insurance-Sponsored Investments (ISI's) can provide potential investment mediums for this purpose.
You can review BRIEF information on each by clicking the respective links:
Work with Gifting Professionals
Knowing how to effectively maximize your gifting allowances is an area that we excel in.
We have worked with some of the country's wealthiest families in formulating effective, long term gifting strategies with a high emphasis on tax mitigation.
Action To Take If you would like to learn more about Gifting
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