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The Montana Estate Lawyer

Saturday, December 3, 2011

It's the Holiday Season - time to think about gifts.

At this time of year we are frequently discussing gifts with our clients.  It's a confusing topic.  We need to consider gift tax, estate tax and income tax.  We can just touch on a few basics here, but I thought it might be useful to cover some of the questions that we go over with our clients.

First, let's be clear:  the tax effect of a gift is important, but we need to start by deciding whether it even makes sense to consider a gift.  Can you afford to make the gift?  Does the intended recipient want or need the gift?  If you gift it to him or her, will it just be wasted?  Will it end up doing more harm than good for the recipient?  Should you give the gift with some management "strings" such as those in a trust?  Only after these issues have been considered do we get to tax.

Most are aware of the annual gift tax exclusion (now $13,000 per recipient) and want to know how much they "can" give.  You can give away as much as you want.  You are not limited to $13,000.  The question from a tax standpoint is how much, if any, tax your gift will generate, and when.   In many cases the answer is that there will never be any tax payable by anyone - even if the gifts exceed $13,000 per recipient.

A gift is not income to the recipient, so the recipient won't owe any income tax, no matter how big the gift.  The only one who ever has to pay gift tax is the donor.  Currently a donor won't have to pay any gift tax until he or she has given away $5 million.  Not many of us are going to do that!

When you give away more than $13,000 per recipient in a year, you must report the gift, and the excess of the gift over $13,000 could trigger extra estate tax when you die - if your estate exceeds the exclusion amount (currently $5 million).  So, generally, those with estates that will be subject to estate tax are the only ones who have to worry about paying gift or estate tax.  Even for those people, gifting is often a great strategy to reduce taxes.

We've been talking about gift and estate taxes.  An important point to mention is that there can be an income tax effect down the road when you gift appreciated property.  That's because, when the recipient of the gift sells it later, he or she will likely pay more income tax on that sale than if he or she had inherited the property.  This is the distinction between "carry-over basis" and "stepped-up basis" that you have likely heard about.  The important point here is that gifting is a great strategy, but if you're going to gift appreciated property, we'll want to analyze the income tax effect and see what makes most sense.

So, have I made things clearer or murkier?  I hope this discussion will be helpful.  And I hope that you'll seriously consider making some gifts this Holiday Season!

Keith


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