Lifetime Gifts

September 1, 1999 Advisory

Love and affection can be sufficient motivation to make gifts. But savvy planners can also use lifetime gifts to significantly reduce future estate taxes. Care must be taken, however. The Internal Revenue Code and Connecticut law impose a gift tax on gifts in excess of $10,000 and on gifts of future interests. (Connecticut gift tax applies to gifts by Connecticut residents of intangibles, such as money and securities, and to all gifts of tangible personal property and real estate located in Connecticut.) Gifts to most charities are exempt from federal and Connecticut gift tax.

The Annual Exclusion.
If you are concerned about estate taxes, you may be able to reduce your estate by giving away up to $10,000 a year to your children, grandchildren, other family members or friends. There is no limit on the number of persons to whom you can give a separate gift, but only one $10,000 exclusion per year per recipient is allowed. Any amount over the annual limit per recipient is subject to the gift tax. Married couples can split gifts, which means that they can make non-taxable gifts of up to $20,000 per year per recipient and each gift will be treated as made one-half by each spouse.

Gifts of a Present Interest.
To qualify for the annual exclusion, gifts must be of a present interest, not of a future interest. This means that the recipient of the gift must have the right to immediate use of the money or property that is transferred. Thus, unless the beneficiary has an immediate right of withdrawal, most transfers to a trust will be gifts of future interests for the beneficiaries, and, as such, will be subject to gift taxes.

The Unified Credit.
Under federal law, each of us is allowed a credit that can be used against either the gift tax on lifetime taxable gifts or the estate tax on gifts made at our death. As of 1999, the credit will shelter from tax gifts with a value of up to $650,000. This amount is currently scheduled to increase to $1,000,000 by 2006. To the extent you use your credit during life, it reduces the amount of the credit that is available to offset any estate tax at your death. However, if you transfer property that appreciates in value, a lifetime gift is more effective tax-wise, because the value of the gift and the value of the appreciation has been removed from your estate. Please note that Connecticut does not have a comparable state gift tax credit.