THE ANNUAL DONEE EXCLUSION
Taxpayers sometimes fail to recognize they can give $13,000 per year to as many donees as they desire. Note that this gift must be a present interest gift as defined by the Internal Revenue Code, regulations and case law. Basically, a present interest gift is one where the recipient can enjoy the immediate benefits of such a gift in a significant way. The benefit here can be seen when the maker of a gift gives this amount to say 5 children during the year. This will allow him to transfer $65,000 to beneficiaries without any estate or gift tax costs. If this was done over a 10 year period, $650,000 would be exempt from estate and gift taxes. With marginal federal estate tax brackets as high as 45%, the savings would be $292,000. In addition, these gifted amounts may not be taxable for state inheritance tax purposes.
SPOUSAL JOINDER FOR THE ANNUAL DONEE EXCLUSION
In addition, the spouse can join in a present interest gift for an additional $13,000 annual donee exclusion. This would double the savings set out in the prior example.
GIFTS THAT ARE EXEMPT FROM GIFT TAXES
Certain gifts can be made above and beyond the annual donee exclusion without limit. Gifts made as a result of direct payment of medical expenses and tuition expenses paid on behalf of another are not taxable gifts as long as the payments are made directly to the medical provider or school.
GIFTING THROUGH THE USE OF AN IRREVOBLE LIFE INSURANCE TRUST(ILIT)
Owning a life insurance inside an irrevocable life insurance trust may allow for dual benefits. First, if structured correctly the insurance proceeds would be free of federal estate taxes. Secondly, payments to the trustee that are used to pay premiums on such policy can utilize the annual donee exclusion if certain procedures and requirements are met. The use of so-called "Crummey notices" are essential. Finally, care must be taken to deal with the so-called three year rule if a current policy is transferred to an ILIT.
TAKING ADVANTAGE OF DISCOUNTS FOR MINORITY INTEREST, LACK OF MARKETABILITY, ETC.
Gifting of shares in a family limited partnership, in a closely held business or partnership can reduce the value of gifts by the use of certain discounts. Where the donor is giving the donee a minority interest that in most cases will not be freely transferable, the IRS permits the valuation of such gifts to be discounted for such limitations. In addition, as gifts are made the ownership interests of the gifting owner are reduced and these remaining interest may be subject to discounts.
USING THE UNIFIED CREDIT DURING LIFETIME
Where a taxpayer has an asset that is expected to appreciate greatly in the future, it sometimes make sense to gift the property at its current value. This may use up some or even all of the unified credit but it may make tax sense to do so.