Gift Tax Reduction Strategy

The previous blog showed that once the $1,000,000 gift exemption limit is reached for the giving of gifts a gift tax is imposed. This gift tax rate is at least 41%. For a transfer of wealth to be considered a gift, 4 conditions must be met: 1) a capable donor, 2) a capable donee, 3) delivery and acceptance, and 4) intent to make the gift by the donor. The tax is paid by the donor.

If you have accumulated wealth and do not want to give at least 41% to the government, you need a gift tax reduction strategy. Three other reasons exist to make gifts: 1) the appreciation of the property is transferred to the donee further reducing the tax liability, 2) reduces the donor's gross estate reducing estate tax liability and 3) shifting of income and overall reduction of income tax liability.

The easist strategy is to make gifts below the annual exclusion limit. For 2008, an individual can give up to $12,000 in a year per recipient. For couples, a gift splitting election can be used raising the limit to less than $24,000 in a year per recipient. Gifts are typically given to children and grand children and can be given for as many years as possible. For example if you are married and have a total of 10 children and grand childred about $240,000 can be gifted without impacting the gift exemption limit and reported on IRS Form 709.

An easy way to give a gift to a minor is through a Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account. The donor retains custody of the account and ownership transfers in the future to the minor at the age of majority typically age 18 or 21. You need to gift assets that give off little active or passive income due to the higher tax rate for the minor. Investing in assets that pay little or no dividends reduces the overall tax liability.

Charities are good entities to make gifts especially appreciated assets. I believe in tithing, giving 10%, of you income and this is typically done on a cash or check basis. Another acceptable alternative is the transfer of appreciated assets which transfers the capital gains to a tax exempt entity.

If you have a variety of assets which ones are the best to gift? The best assets to gift include: appreciated property to reduce tax on capital gains, fully depreciated property as the tax reduction has been eliminated, and out of state property to avoid probate. Gifts that are less desirable include: property with a value less than purchase as the individual wants to take the tax loss and property not fully depreciated to further reduce the tax.

Additional gift tax reduction strategies exist including various forms of trusts. This is a relatively complicated topic and it is good to get professional estate planning advice.