Use the $10,000 Annual Gift Tax Exclusion

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A way to provide significant tax savings.

While many taxpayers know about the $10,000 annual gift tax exclusion, they do not realize it can be one of the most effective techniques available for providing substantial long-term tax savings. In addition to lowering current taxes, it can be used to move assets out of a taxable estate on a discounted basis and to remove future value from a taxpayer's estate.

Annual exclusion amount. Taxpayers may make annual gifts of up to $10,000 per donee, with no limit on the number or relationship of donees. The gift must be of a "present interest in property," which means an unrestricted right to immediately use or enjoy the property. (or income from the property). Gifts covered by the annual exclusion do not reduce a donor's $675,000 unified tax credit.

Purposeful gifting. Sometimes a taxpayer is unwilling to make gifts because potential donees have not used money properly in the past or the taxpayer wishes to delay their access to me girts benefits. Parents in this situation can make annual exclusion gifts to minors who qualify for Roth IRAs. The parent will control the funds as the minor's guardian. (Obviously, the parent will lose direct control over such funds when the child reaches his or her majority.)

Another alternative may be to use family limited partnerships or trusts to limit family members' access to funds.

Deathbed gifts. "Deathbed" annual exclusion gifts are a significant planning tool. However, if a donor dies before a gift check clears his or her account, the gift amount is includible in the donor's estate. Note: A charitable deathbed check does not need to clear to be a valid gift.

Tuition and medical gifts. In addition to the annual exclusion, amounts paid on behalf of an individual for education, training or medical care are not subject to gift tax. Thus, parents and grandparents should consider making gifts of tuition and medical costs for family members without reducing the annual exclusion or unified credit. …