Anyone who has seen children opening presents at the foot of the tree on Christmas morning knows the greatest benefit that you receive when you give someone a gift. It is uncanny how you feel when you are engaged in gift exchanges, even when the people involved are adults. For the most part all of the real emotions that you feel are selfless; you feel genuine gratitude for the gifts you receive, and you feel an ineffable but palpable sense of empathetic resonance when you are giving gifts to others.
When it comes to estate planning, gift giving has tangible tax benefits that go along with the good will that you feel when you give someone a gift. The estate tax was repealed for 2010, but it is returning in 2011. The exclusion amount was $3.5 million when we last saw the tax in 2009, but it is going to be just $1 million in 2011 unless some legislative changes are enacted. So it may be necessary to reduce the value of your estate to gain tax efficiency if its value exceeds $1 million. Giving tax-free gifts is a good way to do that.
When you use some of your assets to give gifts while you are still alive you reduce the value of your estate for estate tax purposes. Of course the IRS is aware of the fact that people could simply give gifts to avoid the estate tax, so there is a gift tax in place. But, there are gift tax exemptions that make gift giving a useful tax strategy.
There is a $1 million lifetime gift tax exclusion, so you can give gifts up to this amount throughout your life free of the gift tax. In addition, there is a $13,000 per person annual gift tax exemption. So you can give as much as $13,000 tax-free each year to as many people as you choose, and these gifts don’t impact your $1 million lifetime exemption.
If you have sufficient means, giving gifts is a win-win situation. You get to experience the joy of giving while you are still alive to see the smiles on the faces of your loved ones, and you gain a valuable tax advantage in the process.