Family Gift Giving Essentials

Family gift giving is an important part of many estate plans. Make it an even better tool by maximizing the power of your gifts.

Make New Year gifts. Most people wait until year end to make gifts. It is better to give at the start of the year. Gift taxes are based on a property’s value. If you give mutual fund shares, for example and the fund will appreciate 10% during the year, you can give 10% more shares if you give early in the year.

Early gifts ensure the property is out of your estate for the year. Early giving also keeps any income from the property off your income tax return. After making your 2003 gifts in December, make your 2004 gifts in January or February if you can.

Increase tax-free gifts. You can give each person up to $11,000 of cash or property each year without owing gift taxes. But education and medical gifts can be unlimited. The payments have to be made directly to the education or medical provider. The medical gifts are unlimited if the expenses would qualify for itemized deductions. The education gifts can be for direct tuition costs only to be unlimited.

Give appreciated property. Today’s 15% tax rate on long-term capital gains is fairly low. You might make it lower by transferring appreciated property to a family member in a lower tax bracket. When the new owner sells, taxes will be imposed at his or her tax rate. If you give to a young child or grandchild, the capital gains rate might be 10% or even less.

Appreciating property makes a good gift anyway, because it ultimately leaves the recipient better off. You could give a flashy gift that will depreciate and be worth nothing in 10 years. Or you could give appreciating investment property that will be worth more than its initial value in 10 years.

Don’t give loss property. A tax loss probably is more valuable to you. Sell the property, deduct the loss on your tax return, and give away the sale proceeds.

Give more than the tax-free amount. Inflation eats away the value of your lifetime estate and gift tax exemption. It is better to use it now instead of through your estate after years of inflation have diminished the credit. Consider giving even if your credit is exhausted. Estate taxes are based on the value of property. If property is worth $100,000 today and appreciates 7% annually for 10 years, it will be worth almost $200,000. It is cheaper to pay taxes now on $100,000 than taxes 10 years from now on $200,000. Be sure to give away only property you can afford to live without.