Annual Gifting Program

As described in the Texas Gift Tax section of our site, the gift tax is a tax imposed as a result of the transfer of wealth from one generation or one person to another during the lifetime of the transferor. It is important to realize that the gift tax is paid by the person who makes the gift, not the person who receives the gift. However, each individual in the U.S. has the ability to give away up to $12,000 per year to as many individuals as they want without incurring any gift taxes. As a result of this ability to give amounts away tax-free each year, a basic method of estate planning involves what is commonly referred to as an Annual Gifting Program.

Example: Plano, Texas Husband and Wife have a total estate of $1 million, and they have 4 grandchildren. Because they are getting older, Husband and Wife would like to start making gifts of some of their money to their grandchildren, but they do not want to pay taxes.

In the example above, Husband and Wife can each give away $12,000 per year to each of their 4 grandchildren. As a result, Husband can give away $12,000 to each grandchild (for a total of $48,000 in one year), and Wife can give away an equal amount. If they chose to do so, Husband and Wife could give away $96,000 to their grandchildren in one year without paying any gift taxes.

Estate Planning Benefits of the Gifting Program...

From an estate planning perspective, an annual gifting program provides two benefits. First, Husband and Wife can reduce their estates by the value of the gifts that they make. When they later die, that money will have been removed from their estates, which will reduce the total amount of estate taxes paid. Secondly, however, is the added benefit that any income or appreciation generated off of the gift after the date the gift is made is also excluded from Husband and Wife’s estates.

Example: Husband and Wife from the example above give $96,000 to their grandchildren in 1996 and place the money in a trust to hold the money for the grandchildren. When Husband dies in 2006, the original money given to the grandchildren has grown to be $203,000.

Because Husband and Wife gave the money away several years earlier, upon Husband’s death, none of the increase after they made the gift is included in his estate at the time of his death.

An Annual Gifting Program can be a highly beneficial way to reduce your estate, pass larger sums to future generations tax-free, and benefit your family members during your lifetime. However, the decision to engage in a gifting program like this should be considered carefully and with competent advice. The lawyers at Ford & Mathiason advise clients on these issues frequently, and we would be glad to assist you.