Originally published in the Manchester Union Leader, December 2011.
Q. How can I make significant gifts to my adult children without paying gift tax?
A.It is the season of giving and what better way than to give to your children without paying tax? Here are four exclusions from gift tax of which you might consider taking advantage.
1. Pay for your children's education. Tuition that you pay to an educational organization on behalf of an individual is exempt from gift tax. Keep in mind that you must make payment directly to the educational institution. Paying back student loans after the fact won't qualify for this exclusion.
2. Pay your child's medical expenses. If your child is incurring large medical bills you can pay for that child's medical expenses. To qualify for this exclusion you must make your payments directly to the medical provider.
3. Give cold hard cash. You can give up to $13,000 a year (or $26,000 per couple) to anyone every year without incurring a gift tax. The simple way to do this would be to give cash, but there are numerous sophisticated estate planning techniques that allow you to take advantage of this annual exclusion amount without handing over cash to your children. For example, you can establish an Irrevocable Life Insurance Trust, of which your children can be the beneficiaries. You would then give money to the trust each year to pay the insurance premiums (using your annual exclusion) but without giving your children real access to the money (except for a withdrawal period). This allows you to fund a large insurance policy to benefit your children and keeps the value of the policy out of your taxable estate at your death.
4.If you have more than 5 million dollars in assets, start giving it away before December 31, 2012. Everyone has a lifetime annual exclusion from gift and estate taxes. At the end of 2010 Congress increased this lifetime annual exclusion amount to 5 million dollars for two years only. Without congressional action, the lifetime annual exclusion amount is set to drop to 1 million dollars in 2013. Therefore, this year and next are excellent times to take advantage of the increased lifetime exemption. There are numerous sophisticated estate planning techniques you can explore that allow you to take advantage of this exemption without handing over 5 million dollars directly to your children.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
