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Is Now a Good Time to Make Gifts?

August 08, 2011

Timothy P. Barry, MST, CPA/PFS, CFP®, CRPC®
Tax Director

The combination of recent tax law changes and the current low interest rate environment may make this an ideal time to consider making generous gifts to your family members. 

A regular program of gifting has always been an important way to not only reduce your taxable estate, but also to help family members in need and, in certain cases, reduce the family’s overall income tax burden (however, beware of the “kiddie” tax rules). Lifetime gifts have the added advantages of removing future appreciation of the gifted assets from your estate and allowing you to see the impact that the gifts make during your lifetime. 

Here is a brief overview of the basic gift rules.

Annual gift tax exclusion:

The current law allows you to gift up to $13,000 each calendar year to any one person without incurring a gift tax liability.  The amount of this exclusion is indexed for inflation.  For example, if you have three children and four grandchildren, you could make a total of $91,000 of annual gifts without paying any gift tax.  The annual exclusion for married couples is doubled if each spouse makes a gift or otherwise elects to split the gifts with the spouse.  In this case $26,000 can be given annually to each person (or $182,000 in the example above) without triggering any gift tax.  Since the exclusion is based on a calendar year, you could gift $13,000 to a child at the end of December and then another $13,000 to that same child in early January, and both gifts would be excluded from tax.

Further exclusion for medical and educational gifts:

A special rule allows payments directly to a medical provider, or tuition paid to an educational institution on behalf of others, to be separately excluded from the gift tax regardless of amount.  The amounts thus excluded do not count against the $13,000 annual exclusion.  So for instance, a grandparent could make a grandchild’s college tuition payment of $50,000 directly to the school and then also make a $13,000 gift to the grandchild and be free from gift tax on both gifts.

Lifetime exemption:

For federal gift tax purposes, the amount of any gifts in excess of the annual gift tax exclusion may be sheltered by your lifetime exemption.  The Tax Relief Act of 2010 increased the lifetime exemption amount for gifts from $1 million to $5 million through 2012 and made the exemption portable between spouses.  Any amount of exemption used during your lifetime reduces the amount of exemption available to reduce estate taxes at your death.  For example, if you are married and decide to give your son or daughter a gift of $50,000 in 2011, the first $26,000 (assuming gift-splitting with your spouse) would be excluded, leaving a taxable gift of $24,000.  This $24,000 taxable gift would be offset by your $5 million exemption (assuming you had not used up the exemption previously), resulting in no gift tax liability. 

Of course, you would then have $24,000 less exemption going forward.  The dramatic, although temporary, increase in the gift tax exemption allows families to move substantial value out of their estates without paying any gift tax.  

Any gift that exceeds your federal exemption is subject to federal gift tax, and special consideration should be given to state gift tax consequences depending on where you reside.  For example, Connecticut currently has a gift tax exemption of only $2 million.  Therefore additional planning will be necessary for Connecticut residents to avoid imposition of state gift taxes. 

Leveraging gifts:

Instead of giving someone a present interest in property (in other words, writing them a check) you can use other vehicles – such as trusts – to leverage the use of your lifetime exemption.  The current low interest rates favor this leveraging effect. 

For example, gifts made to a Grantor Retained Annuity Trust (“GRAT”) can be structured to result in an amount of calculated gift that is smaller than what may actually pass to the recipient.  In a typical GRAT, a donor gifts property to the trust in return for an annual stream of payments over a period of years.  When the GRAT term ends, any remaining property in the trust passes to the family member.  Because of the current low interest rates (as determined by the IRS on a monthly basis), there is a better chance that the GRAT’s assets can be invested to earn a rate of return which is higher than the IRS rate used to calculate the gift, resulting in a leveraged gift. 

To illustrate, if you transferred $1 million to a two-year term GRAT, retaining the right to receive $500,000 back at the end of each year from the trust, the calculated gift amount (using the IRS rate for July 2011 of 2.4%) would be around $34,900.  If the assets of the GRAT grew by 5% each year, a total of $77,500 would remain in the trust and pass to your designated family member(s) at the end of the 2 years.  So, in essence, you would have transferred $77,500 to your family but only had to use up $34,900 of your lifetime exemption. 

In fact, the amount of the gift could effectively be reduced to zero by increasing the annual annuity payments.  If, in the above example, the annuity payments were increased to $518,081 each year, the amount of the taxable gift would be zero and the amount passing to the family at the end of the trust term would be $40,434.  It is important to note that bills have been introduced in Congress that would mandate minimum GRAT terms and curtail the ability to zero out the amount of gift.  The status of any changes in the GRAT rules should be followed closely.

There are numerous other ways to make gifts and issues to consider which are not covered here, and gifting should always be done in the context of your overall estate and financial plan.  In addition, you should always consult your tax advisor before undertaking any gift program.

Timothy P. Barry, MST, CPA/PFS, CFP®, CRPC®, is a director with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in West Hartford and Shelton, CT and Rockland, MA.  The firm serves as business advisors for today’s leading companies, non-profit organizations and government entities, working to strategically tailor and consistently deliver tested solutions for unlocking an organization’s full potential.  For more information about BlumShapiro, visit


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