The federal government imposes a substantial tax on gifts of money or property that exceed certain levels. Without such a tax, someone with a sizable estate could give away a large portion of his or her property before death and escape death taxes altogether. For this reason, the gift tax acts more or less as a backstop to the estate tax. And yet, few people actually pay a gift tax during their lifetime. A gift program can substantially reduce overall transfer taxes; however, it requires good planning and a commitment to proceed with the gifts.
Advantages of Gift Giving
You may have many reasons for making gifts — for some gift giving has personal motives, for others, tax planning is what motivated them. Most often, you will want your gift-giving program to accomplish both personal and tax motives. A few reasons for considering a gift-giving plan include:
- Assisting someone in immediate financial need
- Providing financial security for the recipient
- Giving the recipient experience in handling money
- Seeing the recipient enjoy the property
- Taking advantage of annual exclusion allowance
- Paying gift tax now to reduce overall taxes later
- Giving tax advantaged gifts to minors
