Under the current law you can give gifts tax-free up to $13,000 per year. This can be either cash or other property. For example, if you gift to family members and you have a large family with five children and five grandchildren, this means you can give away up to $130,000 per tax year. Assuming an average 35% federal estate tax rate, your estate would save $45,500 in estate tax upon your death. If you are married, you and your spouse can each make annual gifts of $13,000 per person. This doubles the total amount that can be gifted to the children, grandchildren or others in a single tax year.
In addition, each individual has a lifetime federal estate tax, gift tax and generation skipping tax exemption on transfers up to $5.0 million in 2011 and $5.12 million in 2012. Oregon and Washington have their own exemption amount relating to state taxes. Oregon exempts the first $1.0 million and Washington has a $2.0 million exemption. However, neither state has a gift tax so the limitation is not currently an issue.
Although you and your spouse together can, with gift splitting, give away $26,000 to each recipient tax-free each year, please note that when you make the gift, you lose control over the property gifted. Further, prior to making an annual gift, consider whether the beneficiary has any issues that might put the gift in jeopardy, such as bankruptcy, creditor problems, potential divorce, addiction, or financial immaturity. You should also consider your future income needs. Do you have enough money if there is a further economic downturn?
If your circumstances justify taking advantage of an annual gifting program within the annual tax-free limit, the benefits are that you avoid gift tax, the recipient does not pay income tax on the gift, the annual gift does not reduce your lifetime exemption, and at death you save, at the current rates, about 45% in federal and state estate tax. In addition to the annual gift tax exclusion amount, you retain the right to take advantage of the lifetime gift tax exclusion. At the time of death, the total amount of lifetime gifts are totaled to determine how much of your property and money can pass at your death tax free.
Give the Gift of Health and Education
To take advantage of the health and education exemption, you must make direct payments for qualifying medical and educational expenses. It does not matter what your relationship is to the recipient of the medical or educational expenses, as long as you make payments directly to the medical or educational provider. Qualifying educational expenses include tuition, but not books, dormitory fees, board or other similar expenses. Qualifying medical expenses include expenses for diagnosis, cure, mitigation, treatment or prevention of disease, or for the purposes of affecting any structure or function of the body essential for medical care. The unlimited health and education exclusion can be used for death bed planning by prepaying someone’s tuition cost. The qualified medical and educational gifting exclusion is in addition to and does not replace the annual exclusion for gifts.
One size does not fit all. Each person’s circumstance is unique and there are multiple transfer options and strategies. To discuss your situation and options, please contact one of our estate planning attorneys.