Tuesday, April 26, 2011

Tax Exclusive Nature of Gifts

I’ve recently written about the unique opportunity Boomers now have to transfer significant amounts of wealth to the next generation.  Due to the recent changes in the gift tax laws, a $5M exemption, gifting is a very real and valuable tool to use. Click here for further discussion on the new gift tax laws.

If my goal is to maximize the monetary transfer to my child, gifting presents the best opportunity.  Let me explain.  Let’s assume for the moment that I have a taxable estate (and the gift tax is currently 35%).  If I want to gift my child $1, I will pay a gift tax of $0.35.  However, if I wait to try to transfer that same $1 at my death, my estate first has to pay the estate tax of $0.35. This means that only $0.65 will get transferred to my child.

Said another way…the gift tax imposed on the donor is calculated based on the value of the gift passing to the donee (after the imposition of gift tax).  The estate tax, on the other hand, is calculated based on the total value of the taxable estate, regardless of the net amount passing to the beneficiaries of the estate.

Again, the result is being able to maximize the transfer because the tax is paid after the gift.

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Garrett Griffin