Mark W. Jordan Estate Planning Law Blog on Lawyers.com

This is the first of a series of articles providing helpful information on estate planning through a question and answer format.  Please contact the estate planning professionals at The Drew Law Firm for more details on any of these topics or for any of your estate planning needs.

                                                                    Gifts

Q:        Why are gifts useful in estate planning?

A:        Gifts remove assets from your estate.  Shrinking the estate reduces estate taxes, probate costs, and estate administrative expenses.  You will benefit even more if the asset you are gifting is likely to appreciate in value during your lifetime, since you will be saving the estate taxes on the potential growth.

Q:        What is a gift?

A:        A gift is any transfer, sale, or exchange of property from you to the donee for less than full consideration.

Q:        How much may be given tax free?

A:        As of January 1, 1009, you may give up to $13,000 each calendar year to each person completely gift tax free.  If you are married and your spouse joins in the transfer, the annual gift tax exclusion is $26,000 per donee (even if all of the assets come from you).

            In addition, your applicable exclusion amount (sometimes called the unified credit or lifetime exemption) enables you to give an extra $1,000,000 ($2,000,000 if your spouse joins you) of lifetime gifts without a penny of gift tax.

            None of your charitable contributions count towards either the annual gift tax exclusion or the lifetime exemption.  You may give an unlimited amount to a charity without the payment of any tax.  Also, any amount paid directly to a university for the donee’s tuition, room and board, or to a medical facility for the donee’s medical expenses are not treated as taxable gifts.

Q:        Who benefits from the gift?

A:        Besides the obvious benefit of the receipt of the gift, the donee has the opportunity to gradually learn how to deal with larger sums of disposable income, which over a period of time will enable the donee to be more experienced in handling assets and become more financially mature.  It is far better for a child to learn how to spend a small allowance, a young adult to deal with small gifts, an adult to deal with more substantial gifts, etcetera, than to suddenly thrust an inheritance into the hands of an individual who lacks financial experience. 

            With business succession planning, it is important to gradually transfer stock to the individual you are grooming to be the next owner and CEO.  Too often the current owner does not want to give up any portion of the business, and the next generation inherits the company with a serious lack of experience in handling finances and making decisions.