Gifting, Part 1: The Easiest Gifts to Make

Yesterday I talked about how Oprah wanted to treat $5,000 payments to 100 of her employees as gifts, not compensation.  Her reason for wanting this treatment stems from the fact that gifts can be an incredibly easy (and essentially tax-free) way of transferring property.

Section 2503(b) of the Internal Revenue Code defines the term "taxable gift," and also talks about what I refer to as the "annual gift tax exclusion amount."  This is the amount of gifts you can make to any person in a given year without creating a taxable gift.  The amount shown in the Code is $10,000 per year, but this is adjusted for inflation, and is currently at $11,000 for the year 2005.  That means you could send an $11,000 check to every person in the Chicago phone book without suffering any gift tax consequences (plus, think about the PR value!).

A more realistic use for the annual gift tax exclusion amount is to reduce the size of your estate by making gifts to family members (broadly defined).  For instance, if you and your spouse have three children (each of whom is married) and four grandchildren, you can transfer $220,000 out of your estate by giving $22,000 (or $11,000 from you and $11,000 from your spouse) to each of these ten family members.  This can be done every year.

The amount transferred is even greater when you account for the time value of money.  If a person gives you the choice of receiving a $22,000 gift today or $22,000 when the person dies, take the $22,000 gift today.  If you invest that amount at 7%, it will be worth more than $85,000 in 20 years.  As a result, lifetime gifting is a great way of removing property (and its appreciation) from your estate.

Of course, the easy gifting I discuss above must in fact be "easy."  If you are transferring hard-to-value property (like real estate or business interests), or are making a gift of a future interest (like a gift to a trust for someone's benefit), you will want to retain an attorney and/or accountant, and will probably want to file a gift tax return.