Annual Gift Tax Exclusion Now $12,000
[January 1, 2006]
Donald N. Freedman
Susan H. Levin
Ellen M. McVay
Hope C. Vassos
Kristin Wildman Shirahama

The annual gift tax exclusion has increased from $11,000 to $12,000 effective January 1, 2006. The gift tax exclusion is the amount the Internal Revenue Service allows a taxpayer to gift to another individual each year without reporting the gift.

If individuals or couples have estates of a size above tax-free levels for state or federal estate tax, one strategy to lessen their potential tax liability is to make gifts within gift tax exclusion limits. The gifted assets are then not subject to gift tax at the time of the gift, or estate tax at death. This is a potentially powerful tool. Every $12,000 gift from funds otherwise subject to estate tax at death will save at least $4,500 in estate taxes, depending on the size of the estate.

An individual can give up to $12,000 each calendar year to each of any number of individuals, without gift or estate tax liability, and without the need to file a gift tax return. For example, it an individual has three married children and six grandchildren, he could gift a total of $144,000 per year to each of his children, spouses of children and grandchildren each calendar year.

A couple can gift up to $12,000 each from individually held assets, or $24,000 from jointly held assets. Substituting grandparents for the individual in the example just given, a total of $288,000 could be gifted each year, without liability and without a return.

A special "split-gift" rule is also available to married couples, under which spouses can agree that the gift from one of them be treated for tax purposes as if half had come from each. This may be useful where assets are held in the name of one spouse only due to liability concerns, or where one spouse's assets are tied up in real estate, tax-deferred accounts, or are otherwise illiquid. However, to take advantage of this rule, a gift tax return must be filed. For example, one spouse may gift $24,000 of her own money to an individual each year, with the consent of her spouse, indicated on the gift tax return, that the gift be treated as a split gift.

To qualify for the annual gift tax exlusion, the gift must be of "a present interest." Generally this means that the person receiving the gift must have access to the gift at the time made. Gifts in trust often do not meet this requirement because the trustee has the discretion to make distributions over time. However, the IRS does treat gifts to certain types of trusts as gifts of present interests.

Remember also that some gifts are not subject to the $12,000 limitation; for example, if certain requirements are met, payments for the benefit of another for medical or educational services are not subject to gift or estate tax, without limitation as to amount.

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