For updates on estate and gift taxes and estate planning, including changes under the new tax laws passed on January 1, 2013, refer to the articles listed at the Nolo Estate, Gift and Inheritance Taxes web page.
Gift taxes are paid by the person who makes a gift and are intended to prevent wealthy individuals from avoiding estate taxes by giving away all or most of their money or property before they die. Gift taxes are a complex topic, but here is the basic rule you need to know: Under the law in effect during 2012, a single person may give away a lifetime total of up to $5.12 million and a married couple up to $10.24 million without having to pay any gift taxes.
When you give a taxable gift, the amount is subtracted from your lifetime exclusion amount. However, smaller gifts are not counted toward the exclusion. For 2012, you can give $13,000 per year ($26,000 for married couples) to any number of individuals without having to pay any gift taxes and their value is not subtracted from your $5.12 million exclusion.
For example, you could give 10 people $13,000 each during 2012 and the $130,000 total in annual gifts will not be subtracted from your lifetime exclusion. However, if you give any single individual more than the annual exclusion during the year, the excess will be subtracted from your exclusion and you will have to file a gift tax return.
No gift tax is due until your total gifts exceed the exclusion. In 2012, a 35% gift tax must be paid on any gifts that exceed the exclusion amount. However, all gifts you make to your spouse are tax-free, as long as he or she is a U.S. citizen.
This generous gift tax exemption--the highest it has ever been--was scheduled to expire at the end of 2012. If it was not extended or changed prior to 2013, the gift tax exemption amount would have gone down to $1 million--the same level it was in 2002, before the Bush tax cuts went into effect. Moreover, the gift tax would have risen from 35% to 55%.
However, under the American Taxpayer Relief Act passed on January 1, 2013, Congress did take action on gift tax laws. The gift tax exemption amount was set at $5.25 million for 2013, indexed for inflation in future years. In addition, the gift tax rate was increased to 40%, up from 35% under prior law.
Of course, giving away significant money or assets is never easy and requires careful planning.
You have many options about how to make such gifts. You can give cash, stock, collectibles, land, buildings, or just about anything else of value. However, your gift must be real--that is, you must give up ownership and control over the property.
You can simply give money or assets to your intended beneficiaries with no strings attached. However, if you don't want your beneficiaries to have complete control over the money (or you want to protect them from creditors or divorce), you can give the money or assets to a trust or trusts you establish which will be administered by a trustee you appoint.