Wednesday, March 31, 2010
In tough economic times, wealthy clients may wish to provide financial help to less-fortunate family and friends. Unlike the the federal estate tax, however, the federal gift tax has not been temporarily repealed.
According to Deborah L. Jacobs, Five Tax-Free Gifts to Family, Forbes, March 26, 2010, the following five gifts are ways wealthy clients could carry out their generous intentions without incurring a gift tax bill from Uncle Sam:
- Capitalize on Cash Gifts: The annual exclusion allows a donor to make gifts of $13,000 to an unlimited number of donees each year. A donor could even give to minors by placing money in a custodial account that an adult other than the donor oversees.
- Fund a Section 529 Education Account: This is another way to use the $13,000 annual exclusion. Money invested will grow tax free and can be withdrawn tax free if used for education.
- Pay Tuition and Medical Expenses: Directly paying someone else's medical expenses or tuition is not a taxable gift and is excluded from the gift tax separately from the $13,000 annual exclusion.
- Lend Money: Another way to use the $13,000 annual exclusion is lending money at favorable interest rates.
- Buy a House and allow loved ones to live in your property rent free: It is unclear if this constitutes a gift, so steps such as keeping an at-will arrangement or making the rent-free inhabitants co-owners of the home may be beneficial in the long-run.