There are many reasons that may motivate one to give gifts.  From an estate planning perspective, however, lifetime gifts offer significant tax advantages.  The overall tax burden on the transfer of assets from one generation to the next can be significantly reduced by a planned giving program. Some of the rules that make lifetime gifting advantageous are highlighted below:

  • Annual Exclusion. An individual may make an outright gift of up to $14,000 each to an unlimited number of people during the tax year without incurring federal gift or generation-skipping tax. Married couples may elect to “gift-split,” doubling the annual exclusion amount to $28,000. The annual exclusion is indexed for inflation. Gifts to trusts in the annual exclusion amount are subject to special rules.
  • Medical and Educational Expense Exclusion.  A donor may make an unlimited amount of tuition payments on another’s behalf without triggering a federal gift tax, so long as the payments are made directly to the educational institution and constitute tuition payments. Likewise, monies paid directly to health care providers for medical care on behalf of another are excluded from the federal gift tax. The person for whose benefit the educational and medical payments are made need not be related to the donor.
  • Valuation. The value of the property gifted is determined as of the date of the gift. As a result, gifting appreciating property, such as stock or fine art, results in a greater benefit if the property appreciates. The growth in value after the gift is completed will not be subject to gift or estate tax in the donor’s estate.

Before considering whether gifts should be a part of your estate plan, you should be aware of the ramifications of making lifetime gifts and must first consider your own financial needs. The basic tax concept behind lifetime gifts is to reduce the amount of the donor’s taxable assets thereby reducing the estate tax in his or her estate. When considering whether to make lifetime gifts, it is important to remember that in order to achieve the desired tax objective, lifetime gifts must be “complete and irrevocable.” The regulations say the donor must relinquish “dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another.”

In other words, once a donor has given assets away, those assets are no longer available to her and she may not continue to control those assets. For example, if a parent transfers a residence to a child and retains the right to live in the home for her life, the fair market value of the home is still includible in the parent’s estate for estate tax purposes. Likewise, if a donor transfers money into a trust during his lifetime and retains the ability to revoke the trust, or to change who gets to receive the income from the trust, the full value of the trust assets will be included in his estate if the donor dies still possessing such power, even though he himself did not receive any of the income.

Therefore, any discussion regarding lifetime gifting should take into account whether the donor has sufficient assets in the event of an unexpected illness, disability or financial setback. In addition, the donor must be comfortable with the notion that once the gift is made, whether outright or in trust, the donor must relinquish control.