Monday, November 23, 2009

A wonderful Christmas gift

On Mondays, we answer questions from a reader. Here's this week's question, which has an eye already on the holidays.

QUESTION: I would like to give my grown children a significant cash gift for Christmas this year. I’ve had a good year with my business. However, I don’t want them to incur any sort of tax on it. Is there any sort of guideline for how much I can give and the best way to give them the gift?

ANSWER: Gift rules are simple, but confusing. You can give up to $13,000 to anybody each year without any tax consequence. You and your spouse can give up to $26,000 to anybody each year. No taxes for the recipient, and no tax consequence for the giver(s), either.

If you exceed that amount, you are required to file a gift tax return (no taxes due, though) and keep track of the cumulative amounts given. Eventually, those amounts (total gifts exceeding the annual limit) could impact the size of the giver's estate, and how much estate tax will be due upon death. But, most people won't have a taxable estate anyway, and few givers regularly exceed the annual limits. Basically, keep the gift value below $13,000 per person for 2009, and there's no impact for anyone.

Cash is always a welcome gift, but the annual limit is based on "value." Many advisors recommend the gifting of appreciated assets (stocks or property with a low tax basis) because that avoids a capital gains tax for the giver, and moves those values out of the future estate. Similarly, things that are growing in value very quickly - again, growth stocks or other appreciating assets - are a nice shift, too, because the value today could be much higher when the estate settles eventually.

Most people face little impact at all from a gifting program. For people with a lot of wealth, these can become complex estate planning matters. The simple answer for most folks is that giving away up to $13,000 per year per spouse is a way to be really appreciated by your kids and grandkids. And that Uncle Sam doesn't care at all!

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