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Step 1
Determine whether you are trying to reduce your income or estate taxes, or both. If you are trying to accomplish the former, then you will have to gift assets that produce income. Estate planners can use any asset with a tangible fair market value.
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Step 2
Choose which assets to gift to your children for the purpose of reducing income taxes. This could be stocks, bonds, CDs, mutual funds, real estate investment trusts, or REITs, or Unit Investment Trusts, known as UITs. Even partnerships and oil and gas interests can be appropriate. Any investment that produces taxable income such as stocks, bonds or capital gains can be gifted to shift income to your kids.
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Step 3
Choose different assets to gift if you are seeking to reduce estate taxes. Determine the amount of assets that must be gifted first. If you need to reduce your taxable estate by $200,000, then you must divide this number by the number of kids to whom you are giving gifts. If you have to reduce your estate by a large amount, then you may want to consider including nieces and nephews as well. The assets you choose to gift for estate tax reduction should probably be ones with more potential for capital gains, so that the growth occurs in your kids' estates and not yours.
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Step 4
Check with the IRS website to see the dollar limit of the gift tax exclusion. You can only gift a certain amount of assets to the same party each year without incurring gift taxes. For 2009, the limit is $13,000 per person, but this will change when the sunset provision in the estate tax bill kicks in. (The sunset provision will reduce the amount of money that can be gifted and passed on to heirs to pre-2002 levels, when the current schedule of gift and estate tax exclusions expires. Whether it is renewed or not will depend upon what Congress does when it expires in 2010.)
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Step 5
Make certain that the fair market value of the assets that you gift does not exceed the gift tax exclusion for that year. If they do, then you will have to either pay gift taxes out of pocket at the end of the year or reduce your unified credit (the amount of assets that you can pass to your heirs free of estate tax) by the amount of gifts that exceed the exclusion.
