By the Estate Planning Attorneys at Garg & Associates, PC, serving The Woodlands, Spring, Houston, Conroe, Humble, Kingwood, Tomball, Cypress, Huntsville, Westchase, Southwest, Sugar Land, West Oaks, Alief, Memorial, River Oaks, Stafford, Katy, and Missouri City.

GIFT TAX

The federal gift tax is a tax imposed on the lifetime transfer of wealth when the amount of a gift exceeds an applicable threshold.  It is a “wealth transfer tax,” meaning it is imposed at the point that wealth is transferred from a donor to a donee. The purpose of the present federal gift tax is to prevent the avoidance of the estate tax by giving away assets during an individual’s lifetime rather than at death.

Although the gift tax is determined based on the value of property transferred, it is not considered a property tax. Just as with the estate tax, it is deemed to be an excise or privilege tax, since the taxable event is the transfer of property; it is not a tax on the property itself. Another way of viewing the gift tax is that it is a tax on the privilege of transferring property to donees during your lifetime.  

Like the estate tax, the federal law currently in effect with respect to the estate tax is The Economic Growth and Tax Relief Reconciliation Act of 2001 (called “EGTRRA”) signed by President Bush on June 7, 2001. Unlike the estate tax’s progressive increase in exemption amount, however, the lifetime exemption with respect to the gift tax has been capped at $1 million. This means that each individual is able to gift $1 million worth of assets during their lifetime with no gift tax being due. Further, each year, each person is allotted a (currently) $12,000 per-donee annual exclusion, meaning that you may give away $12,000 per year to as many people as you wish without incurring gift tax consequences. Any gifts each year that exceed your $12,000 exclusion will be counted against your $1 million lifetime exemption. Married couples have a further gifting benefit, in that they may combine their per-donee annual exclusions to give away a total of $24,000 each year to as many individuals as they choose.

Not only is it of the utmost importance to recognize which kinds of transfers are considered “gifts,” but understanding how the values of gifts are determined is a vital component of tax planning, since it directly bears on how much of your annual and lifetime exemptions you use in making lifetime gifts. Various methods are available to reduce the value of a gift for federal tax purposes, and a myriad of lifetime gifting strategies may be discussed with your Estate Planning attorney. Remember that lifetime gifting will have a direct effect on your gross estate for estate tax purposes, in that the more you transfer during your lifetime, the smaller your gross estate will be at death. To implement a gifting scheme that will be most beneficial to your unique circumstances, we urge you to explore the possible gift planning mechanisms available to you with the experienced Estate Planning attorneys at Garg & Associates.

Call Garg and Associates today at 281-362-2865 or complete our Contact Form and let us assist you with your wills and trusts.