Use of Gift Tax Exemptions to Reduce Estate and Gift Tax
The current federal estate tax exemption is $2 million. An important method of ensuring that your estate will not be subject to estate tax is to make sufficient gifts during your lifetime so that at your death your estate is smaller than the then-current exemption amount.

Your lifetime gifts are, however, subject to a gift tax that is imposed at the same rate as the estate tax. This “unified” system is intended to eliminate any tax advantage to making gifts. But certain types of lifetime transfers are not subject to gift tax and the end of the year is a good time to make these tax-free gifts.

Annual Gift Tax Exclusion
The most commonly used method for tax-free giving is the annual gift tax exclusion, which allows you to annually make a gift of up to $12,000 to a recipient with no gift tax. There is no limit on the number of recipients to whom you can make such gifts. For example, if you make identical gifts to 10 recipients, you can exclude up to $120,000 from tax. In addition, if you are married you can double the amount of the exclusion to $24,000 per recipient, because you and your spouse can combine your exemptions in a single gift.

The annual exclusion is applied on a per-recipient basis. As a result, you can leverage the exclusion by making gifts to multiple members of the same family. For example, you could make $12,000 gifts to each of your son, his wife and his daughter, for a total of $36,000 in tax-free gifts. This tax-free amount can be doubled to $72,000 if your spouse joins in the gifts.

Section 529 College Savings Plans
Distributions from a 529 plan can be used for a wide range of educational expenses, including tuition, fees, books, supplies, and room and board. An added advantage of a gift to a 529 plan is that the income earned on the plan contributions is tax-free, as long as it is eventually used for educational purposes. Thus, you can reduce your own income taxes by funding a 529 plan with savings that would have been used for college anyway. And because you can name yourself as the custodian of the account, you ensure that your beneficiary uses the account for educational purposes.

A special rule allows you to use up to five annual gift tax exclusions when funding a 529 college savings plan. You can fund a savings plan with up to $60,000 (5 x $12,000) this year and then file an election with the IRS to spread this gift over five years (2007 - 2011) for gift tax purposes. By using five annual exclusions, the entire gift becomes tax-free.

Gifts in Trust
Despite the tax savings, you may be uneasy about making outright gifts to your children or grandchildren, due to your loss of control over how they use the gift. This concern can be addressed by making the gifts in trust, which will allow you to determine when they receive the money and how it is to be used.

There are special requirements for ensuring that a gift in trust qualifies for the $12,000 annual exclusion. Usually, the trust is drafted to provide the beneficiary with sufficient control over the gift that it is considered a present interest rather than one that vests in the future. Although this presents a risk of the beneficiary withdrawing the gift from the trust, the probability of your terminating any further gifts to the trust is usually sufficient to prevent this. If you are interested in making a gift in trust, we will be glad to explain how this can be done.

Please contact the Law Offices of William H. Copperthwaite Jr., L.L.C. if you have any questions on gift giving/estate planning.

Please note that the information contained in this summary is intended for informational purposes only and is not to be considered legal advice. For specific legal advice, the Law Offices of William H. Copperthwaite Jr., L.L.C. will be able to assist you in answering your legal questions.