Act on These Year-End Tax Planning Resolutions Before the New Year

For many, the close of the year is a natural time to consider making gifts to loved ones that qualify for the annual exclusion from gift taxes. These gifts can be made in amounts up to $11,000 per donee, per year. Married couples can give twice that amount, or $22,000.  Annual exclusion gifts made consistently year after year to children, grandchildren and their spouses can effect a very significant reduction in the donor’s taxable estate at death. When making year-end gifts, however, it is important to keep in mind that other gifts that you have made throughout the year to or for the same beneficiaries reduce the available annual exclusion. Such gifts might include amounts paid to fund 529 college savings accounts, to pay premiums on life insurance policies held by irrevocable life insurance trusts, and to purchase presents for birthdays, holidays or special events. 

Remember, too, that payments made directly to an educational institution for a loved one’s tuition or to a health care provider for that person’s medical expenses are not considered taxable gifts.

Year end is also the ideal time to make gifts of property that require you to obtain an appraisal, such as gifts of shares of a family corporation or partnership interests in a family limited partnership.  Whether you plan to make gifts that will be limited to the annual exclusion or you intend to make larger gifts, you can have your appraisal work “double duty” by making gifts at the close of one year and again at the beginning of the following year. Since these gifts will be separated by only a few days, the same appraisal can be used to substantiate the value of gifts in both years.

When making gifts that exceed the annual exclusion amount and that do not qualify for the educational or medical exclusions, it is important to remember that aggregate gifts to individuals other than a spouse that exceed $1,000,000 require the current payment of gift tax.  Although the exemptions from the estate tax and the generation-skipping transfer tax are scheduled to increase to $1,500,000 on January 1, 2004, the gift tax exemption will remain fixed at $1,000,000, even if the estate tax is repealed, as it is scheduled to be, for one year, in 2010.