Giving Away Money to Reduce Your Estate and Minimize Taxes

I mostly write about accumulating assets and saving for the future because 1) that's the stage of life I'm in now and 2) most people need help in this area more than any other. But what if you're past this point and have more than enough money? What can you do to get rid of your wealth while you're living and reduce your estate taxes when you pass on?

Actually, it's quite simple: you can give your money away. But you can't give all of it away immediately without incurring some tax consequences.

So what are the details involved in doing this? Yahoo lists a few of the keys in a piece listing how shrewd gifts can cut your estate tax. Let's start with the basics:

In 2007, each person can give away up to $12,000 of assets to any number of recipients.

In other words, each person can give another person up to $12,000 with no tax consequences. That's about as plain and simple as it gets.

But there are ways to give away even more with no tax impact:

Married couples can both use the $12,000 exclusion. Together, they can give away up to $24,000 a year.

So, for example, I can give someone $12,000 with no tax impact and my wife can give that same person $12,000 as well -- again with no tax impact. That way, we can give someone $24,000 without any tax issues being raised.

BTW, please do not email me asking for money. I'm using the fact that we CAN give money away as an illustration. I'm not making an offer to give anyone $24,000. ;-)

Using this method, you can give away some serious money:

If Jim and Joan Smith have three children they can give away $72,000 in 2007. At current levels, they can repeat that yearly. After a decade, they will have shifted a total of $720,000.

And, there are other no-tax ways to lower the value of your estate:

There is no tax on gifts to charity.

Most gifts between spouses aren't taxed. For married U.S. citizens, generally there is no limit to the amount that one can give to another.

Some gifts qualify for medical and education exceptions. You can pay someone else's medical bills without owing gift tax, no matter how large they are.

The same is true for payments of another person's school tuition. Either way, the payments must be made directly to the school or to the health-care provider, Finn says.

But, there are limits:

Each individual is entitled to a $1 million lifetime gift tax exemption. You and your spouse each can make $1 million of taxable gifts without paying gift tax.

I know -- most of us will never be in the place where we will give away $1 million and have plenty left over to live on. That said, many people will leave behind $1 million in their estate -- and you definitely want to be able to direct where that money goes. As such, we all need a will.

Comments

[Ciji]

the very fact that there's a tax on gifts (money you've probably already paid taxes on anyway) just proves how crazy our tax system is.

[Kenny]

What I am having a hard time understand is how does IRS know that you gave away $13,000 (or $25,000 for married) and now you owe gift tax on $1000 in that calendar year. Money moves so rapidly between accounts in the US for most people that it has to be difficult. I have asked Financial Planners and Advisors and NEVER ONCE gotten a good answer.

I am not saying that we lie. I'm just saying that all this hoopla about NOT being able to give money to our own family without someone looking over our shoulder!!!!!! How ridiculous is that. I will probably buy Gold coins and give it to my kids who can then cash them out of dump them into their account!!!!!!

Hope you can help.....

Kenny

[FMF]

Kenny --

They know because you report it -- just like you report your income, deductions, etc. It's a little thing known as "the law." Now if you don't like it, you can work to elect people to eliminate the reporting/constraints, but until then, you must report.

[Katie]

So can you give more than one person 24 thousand? Say there is a family of five and me and my husband give 12 thousand to each family member?

[FMF]

Katie --

You can give away as much as you like -- there will just be taxes on the amount over the $13,000 (the gift tax exclusion amount for 2009) you give each person.