Taxable Gifts Get New Look From Wealthy

From Financial Advisor Magazine:

Right now, anyone can make unlimited gifts to individuals of up to $13,000 each year without owing tax on them. Any amount above that is taxed. There is a $1 million lifetime gift tax exemption.

For 2010, the gift tax rate is 35%. Differences between the estate and gift tax rules mean that if the donor survives the gift by three years, the effective gift tax rate is effectively only 26%. Next year, unless Congress acts, the top tax rate on gifts and bequests over $1.2 million will be 55% with an additional 5% surtax on transfers from $10 million to $17.1 million.

Prepaying gift tax rather than waiting and paying estate tax can make sense in certain scenarios.

An example: A man has $6 million left, and his estate will be in a 55% tax bracket after 2010. If he waits until he dies and bequeaths the money, the net transfer is only $2.7 million. If instead in 2010 he makes a taxable gift, he can give $4.4 million—64% more—and pay the taxes with the rest; at a 35% rate, the gift tax would amount to $1.5 million. He must survive the gift by three years for the tax brackets to apply.


Taxable Gifts Get New Look From Wealthy