Gifting has specific advantages for those in the twilight years of their lives. Before deciding on an estate planning strategy, it's important to understand the inherent benefits of gifting as a part of that strategy.
Reduce Estate Taxes
Reducing estate taxes is the primary reason for gifting. When you make a gift of either cash or property, it reduces the size of your estate and thus the amount of tax to be paid.
Every year, the donor is given a set amount they can give without owing gift tax. As of January 1, 2009, this exemption is up to $13,000 per year. In practice, you can reduce your personal estate by $13,000 (or $26,000 for married couples) every year, thereby reducing your estate tax obligations.
Avoid Estate Tax Increases
Within the same tax code, there is a one-time exemption for gifts larger than the annual exemption. This amount in 2010 is $600,000 and can be used for items such as real estate or company stocks.
The advantage of making such a gift is twofold. First, if the gifted property gains in value between the gift date and the estate transfer, the appreciation will not affect the estate or increase your tax burden. Second, if the property generates income, stock dividends or royalties, for example, the income will not be factored as a part of your estate.
Alleviate Recipient of Capital Gains Tax
Recipients of a gift are generally free of any tax obligations, unlike a sale of property or the transfer of a large amount of money. This is particularly beneficial for larger gifting that falls under one of following special Internal Revenue Service exemptions:
First, gifts made for payment of tuition or medical expenses are exempt. It should be noted that these payments must be made directly to the servicing organization and not to the service recipient. Next, gifts made from one spouse to the other. Finally, gifts made to political organizations for their use also qualify.
In any of the above circumstances, there is no annual limit to the amount you can gift free of a gift tax obligation. Likewise, there are no capital gains tax obligations for the receiving party.
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