One goal of estate planning is to ensure enjoyment of property while the owner is alive and then, at death, transfer it according to their wishes. Some people believe that they receive the greatest benefits from estate planning when they transfer property before their death, enabling them to witness the outcome. This is accomplished through an estate-planning tool called gifting. A person (donor) transfers property to another (donee) for various reasons. Among them: emotional, business, to help finance a college education, or to pay medical costs. Gifting can reduce the size of the estate that must pass through court administration. This should cut probate costs and, to some extent, federal estate taxes. The annual gift exclusion for 2011 is $13,000 per person.
Requirements For A Valid Gift
To be valid, a gift must usually meet the following four requirements:
- The donor must be capable of transferring the property;
- The donee must be capable of receiving the property;
- There must delivery to and acceptance by the donee’s agent, and
- There must be donative intent on the part of the donor.
Valuation Of A Gift
For gift tax purposes, the value of a gift is its fair market value at the date of the gift.
Some gifts are fully deductible, thereby reducing the taxable gift amount to zero:
- Gifts to a spouse are fully deductible, provided they are not a qualified terminal interest property, or QTIP. (A QTIP is property that qualifies for the marital deduction where the surviving spouse receives interest income during his/her lifetime, but that interest terminates at his/her death);
- Gifts to qualified charities are fully deductible, and
- Payments made directly to an educational institution for tuition, and payments made directly to a provider of medical care on behalf of an individual.
Gift splitting treats a gift of property owned by one spouse as if it were gifted one-half by each spouse. Both parties must consent to split the gift in order to take the annual exclusion for each part of the gift. If each spouse makes a gift to a third party, the gift can be considered as if each gifted one half. If split, each spouse can take the annual exclusion for their part of the gift. In 2011, gift splitting allows married couples to give up to $26,000 to a person, without making a taxable gift.
Gift Filing and Payment Requirements
A gift tax return (Form 709) must be filed by any individual donor who, in any calendar year, gave:
- More than $13,000 (in 2011) to any non-spouse donee;
- A gift of a future interest in any amount; or
- A gift for which a spouse elects gift splitting.
Gifts are an important estate-planning tool for those with taxable estates. Gifts can also accomplish income tax savings. It is important to stress that gifting should be examined carefully. Those making the gifts should be sure that they are not depleting assets to the point they do not have enough for their own support. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or [email protected].