Anyone is allowed to make non-taxable gifts
of $11,000 (or less) per year per person. For a transfer to qualify as a
gift, the person who makes the transfer (donor) may not receive any value in
return. Property does not have to be given to another
outright inorder to qualify as a gift; giving someone limited rights to property may
be a gift. Any gift over the $11,000 annual exclusion amount is taxable. Thus,
an estate may not avoid death taxes by making gifts of assets prior to the
decedent's death.
Although a person generally
can make non-taxable gifts prior to death, gifts above certain will be taxed.
The lifetime limit, known as the "unified credit," for 2002 is $1,000,000 -
See table below for rate schedule. Once the total amount of lifetime gifts
reaches this amount, gift taxes are incurred. It is important to note that
gifts and estates are taxed at the same rate. This rate begins at 41%, and the
highest rate is currently 50%.
A federal gift tax return
must be filed whenever a gift over $11,000 is made. Different rules apply when
a gift to another is considered a "future interest," which means that the
interest does not mature until some future date. When a gift of a future
interest is made, the value of the entire gift must be reflected on the annual
gift tax return. This can be detrimental to the donors because such future
interests can be created inadvertently or through mistake, such as improperly
drafted custodial accounts for minors or the use of certain types of trusts.
In addition, a person can avoid gift tax consequences (through a deduction) by
making a gift to a spouse or charity.
