There are several ways to “gift” a portion of your estate without paying taxes on it.

1. Give to your spouse. There is no limit on the size of the gift and no tax consequences for either party. You must file a federal gift tax return for each spousal gift.

2. Give to a third party donee. (Those to whom gifts are given are called donees.) Not only can you reduce your estate and reduce or eliminate death taxes, gifts are also useful for income splitting. For this purpose, except for your spouse, the IRS considers everyone, even your children, to be third parties. Currently you can gift up to $12,000 each to any number of third parties without paying any tax, without the third parties paying tax, and without reducing your federal estate tax credit. This $12,000 per year allowance is called the “annual exclusion”. If your spouse wishes to join in the gifting, he or she can also gift $12,000 each to the same third parties for a total gift of $24,000 to each donee. As long as you give no more than $12,000 per year to any third party you do not have to report the gift. If a gift of more than $12,000 is made to one person in any year, then the donor must file a gift tax return. If you contemplate a very large gift, consult an estate planning professional. For a more complete discussion see Giving and the Unified Credit below. For current tax rates see the web site: www.irs.gov

3. Give to a qualified charity. In most circumstances you can give an unlimited amount to a qualified charity tax-free. Your charitable gift can consist of any kind or combinations of kinds of property: generally you must transfer your entire interest in the property.

Finally, if you contemplate large charitable gifts, remember that in addition to the potential reduction to your estate, you may be able take a current federal income tax deduction, and possibly a state income tax deduction, depending on the laws in your state.

Giving and the Unified Credit

As noted above a donor is allowed to give $12,000 per year to any number of donees. As an example, a donor could give $12,000 to 10 different donees thereby reducing his or her estate by $120,000 - (10 x $12,000) - and none of them owe any tax on the transaction. Such gifts do NOT reduce the “unified credit” (The federal gift tax exemption and the federal estate tax exemption are “unified” in the sense that the federal estate tax exemption is reduced by the total amount of gifts given to any one donee if the gifts exceed $12,000 in any year.) The unified credit effective exemption amount for gift tax purposes is currently $1 million.

So, under current rules, an individual can give $12,000 to each of any number of other individuals every year with no tax consequences. Assume that the gift giver/donor is giving to a married child. He or she could also give that child’s spouse $12,000 every year, for a total gift to the family of $24,000/year. If that family had children, the donor could also give each of them $12,000 each year, so assuming 2 children he or she could gift $48,000/year to the family, and so on. (If the children are minors, be mindful of the uniform gifts to minors act that may dictate that the money must stay in the children’s names). If all of the gift beneficiaries are over 18 years old, they can receive the gifts without restrictions, all without tax consequences and all without filing any gift tax returns.

Now assume that a married couple wishes to give gifts to their married child, or children. All of the numbers in the preceding paragraph can be doubled since the parents can EACH give up to $12,000 each year to any number of individuals. However… there’s more.

With respect to the amount gifted to any one donor over $12,000 in any year there are two options: Pay gift tax on that amount, or take advantage of the “unified credit”. Under current law that means that at any time between now and at least the year 2013 the donor can gift up to $1,000,000.00 (the current federal gift tax exclusion amount under the unified credit noted above) with no gift tax. The amount of the donor’s estate that would be exempt from federal estate tax at death will be reduced (because of the unified credit limitation) but if the estate will never be large enough to be subject to federal estate tax, the donor might wish to elect this option with no tax consequences either for him or herself, or for a gift beneficiary. In short, the donor can simply gift any amount up to $1,000,000, file a gift tax return** (no tax would be due) and the money can be received by the beneficiary tax-free. Of course the rules and amounts are subject to change, but it is unlikely that the $1,000.000 federal gift tax exclusion amount will be reduced.

** According to the IRS a gift tax return must be filed by April 15 for gifts given in the previous year. In general, if a taxpayer is granted an extension of time for filing his or her income tax return, he or she shall be deemed to have been granted an extension of time for filing the gift tax return for the same amount of time.