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September 1999 - Article 1 The Gift Tax Annual Exclusion The federal
gift tax annual exclusion is an excellent way to shift a portion
of your estate tax-free. As will be illustrated below, taxpayers
can transfer substantial amounts free of gift taxes to their children
or other donees through the proper use of this exclusion. The amount of the exclusion is $10,000 for gifts made in 1999. The exclusion is adjusted for inflation but the adjusted amount is rounded to the next lowest multiple of $1,000, so the $10,000 amount won't increase to $11,000 for several years at current levels of inflation. The exclusion
covers gifts an individual makes to each donee each year. Thus,
a taxpayer with three children can transfer a total of $30,000 to
them every year free of federal gift taxes. If the only gifts made
during a year are excluded in this fashion, there is no need to
file a federal gift tax return. If annual gifts exceed $10,000,
the exclusion covers the first $10,000 and only the excess is 'taxable.'
Further, even 'taxable' gifts may result in no gift tax liability
thanks to the unified credit (discussed below). Please note, this
discussion is not relevant to gifts made by a donor to his spouse
because these are gift tax-free under separate marital deduction
rules. There is a 'present interest' requirement for gifts. For a gift to qualify for the annual exclusion, it must be a gift of a 'present interest.' That is, the donee's enjoyment of the gift can not be postponed into the future. For example, if you put cash into a trust and provide that donee A is to receive the income from it while he/she is alive and donee B is to receive the principal at A's death, B's interest is a 'future' interest. Special valuation tables are consulted to determine the value of the separate interests you set up for each donee. The gift of the income interest qualifies for the annual exclusion because enjoyment of it is not deferred, so the first $10,000 of its total value will not be taxed. However, the gift of the other interest (called a 'remainder' interest) is a 'taxable' gift in its entirety. There is an exception to the present interest rule. If the donee of a gift is a minor and the terms of the trust provide that the income and property may be spent by or for the minor before he/she reaches age 21 and that any amount left is to go to the minor at age 21, then the annual exclusion is available (that is, the present interest rule will not apply). These arrangements (called Code Sec. 2503(c) gifts because of the section in the tax code that permits them), allow parents to set assets aside for future distribution to their children while taking advantage of the annual exclusion in the year the trust is set up. Even if your annual gifts exceed the annual exclusion limits, you may still not have to pay any gift tax because each taxpayer has available a 'unified credit' for taxable gifts made during his/her lifetime. Even gifts that are not covered by the exclusion and that are thus 'taxable,' may not result in a tax liability. This is so, because a tax credit wipes out the federal gift tax liability on the first $650,000 of taxable gifts you make in your lifetime. (The $650,000 amount, which applies in 1999, will gradually rise to $1 million by 2006.) This credit, however, applies both for gift and estate tax purposes (that is why it is called 'unified'). Thus, to the extent you use it against a gift tax liability, it is reduced (or eliminated) for use against the federal estate tax at your death.
Please call us if you would like to discuss the details of your particular circumstances.
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