Gift Tax (Referring to my previous ? on estate & Inheritance Tax)?

Question

Refering to my previous subject "Estate tax and inheritance tax", with all my online research and double confirm from one of the answerers. If my father's total net asset is less than 1 million (With the tax exempt limit of 2 million as per 2006), there is NO Estate tax and Inheritance tax. then here's my another question:
I know that some peoples are giving gift US12k per year to each of their hiers free of gift tax. We were thinking of doing that as well, but with what i discover from my previous question, if all the inheritance from my dad is going to be both estate and inheritance tax free, then what is the point of using the gift strategy? Or am i right that the gift strategy is only needed by those who has more than 2 millions asset?

Answer 1

There is a unified gift/estate tax exclusion of $2,000,000. What does that mean, that means that if you never filed (or needed to file) a gift tax return, your estate would not have to pay any estate taxes unless it was over $2,000,000. If you filed gift tax returns, then the amount of exclusion drops for every dollar of exclusion you used on the gift tax return.

Gift tax returns (Form 709) are used when you give one person more than the exclusion limit in one year. Previously, that amount has been $11,000 and before that is was $10,000. Apparently it is now $12,000. That means that if you gave a single person, say, $22,000 as a gift in one year, you would need to file a 709 and report the $10,000. You wouldn't pay tax on it because it until you've reported more than $1,000,000. However, every amount reported lowers the estate exclusion. So, if you gave one person $522,000 in one year, you would have used up $500,000 of gift tax exclusion and when you die, your estate exclusion would now be only $1,500,000 ($2M - $500,000).

So you see, you can give someone more than $12,000 per year...it is just a hassle to have to do the 709. The good thing is, if your estate is over then $2,000,000, gifts of $12,000 or less will lower your estate and help avoid taxes. Of course, you can give one person $12,000 and give their wife $12,000 and their kids each $12,000 and your spouse can give them each another $12,000...all without triggering any taxes for you or the recipient. It really depends on when you want to give the money. If your estate is less than $2,000,000 then it doesn't matter whether you give now or later.

HOWEVER, you never know what congress will do. They could lower or eliminate the estate exclusion amount at any time. If you got the cash now and want to give, GIVE!

Caveat: Everything I told you I learned in a recent tax class on Transfer of Wealth and is available to you if you do a small amount of research on www.irs.gov. But, I speak only of federal taxes, NOT STATE TAXES. You didn't mention the state you lived in and I probably wouldn't know anything about that state anyway, so do you own research.

My condolences on your lost loved one.

Answer 2

Asswuming that you are sure that the is no gift or inheritance tax in you state and that you state either has no estate tax or they follow federal estate rules then the need to gift would only be to keep the value of the estate down and help the children now.
I would not sell assets to make such gifts nor would I gift assets. This is because under current law all assets passing through the estate would get a step up in basis for income taxes purposes. This means that if the children sold the assets after your father passes there would also not be any income tax as there would be if dad sold assets before he passes.

Answer 3

You would want to make gifts if it was your father's desire to get his estate to his beneficiaries sooner rather than later. You are correct in your conclusion that using "the gift strategy" will have no impact on your father's federal estate tax. Once again, I caution you to do some research into your father's state of residence to determine if there is any state inheritance tax.

Waggy makes a good point about the step-up at death. Of course, it's all a matter of how long the beneficiaries want to wait.

Answer 4

Before considering your inheritance tax-free, you need to check out the estate tax rules for the state your father last lived in because the state dollar thresh-hold amounts are often much lower than the federal requirements.

Answer 5

The perfect question for women's health.