Understanding Gift Tax Rules Prior To Giving

Agency Sales,  Apr 2006  by Eisinberg, Lee C

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As special events draw nearer, you will likely find yourself debating over the perfect gift to give your loved ones. When weighing your options, why not consider giving a financial gift? If that is the route you decide to go, it's important to consider all of the possible tax implications of your gift.

Keep in mind that if you find yourself giving more than the annual gift tax exclusion for 2006 to one person (other than your spouse), you will need to file a gift tax return. It is very unlikely, however, that you would have to pay a gift tax, since you are able to give up to $1 million during your lifetime before incurring gift taxes. You can also elect to split the gift with your spouse, thereby doubling the amount you can give each year.

Any amount you use from your lifetime gift tax exclusion counts against the estate tax exclusion, which is $1.5 million for 2005. For example, if you give $200,000 of the limit during your lifetime, you have reduced by $200,000 the amount that can pass through your estate, free from estate taxes.

When it comes to making a financial gift, some may look to an educational savings plan. You may decide to give gifts to younger family members by contributing to a Section 529 Plan. This type of account is used to accumulate assets for college expenses.

Under a unique provision of the tax code, you can make a large gift in a single year and treat it as if it were made over five years, so no gift tax would be due. For example, if you put in $50,000 to a Section 529 Plan in 2005, you will be deemed to have used $10,000 of your annual gift tax exclusion for each year, beginning in 2005 and going through 2009. Also, withdrawals from Section 529 Plans are tax-free, provided they are used to pay for qualified higher education expenses.

Another alternative might be to gift stock instead of cash. You will need to know what you originally paid for the stock, called its cost basis; how long you've held the stock; and the fair market value of the stock at the date of the gift. Recipients need this information to determine capital gains and losses if and when they decide to sell the stock that's been gifted.

If you have a stock with a very low cost basis relative to what it is currently worth and have excess estate tax exclusion, you might want to keep it in your estate and let your family members eventually inherit it. This may allow your heirs to avoid a large capital gains hit, because they only pay capital gains taxes resulting from the difference between the price of the stock when they inherited it and the price at which they eventually sell the stock.

By knowing the rules involved in giving stocks or other financial gifts, you can make the occasion brighter for those you're gifting and for yourself.

Lee C. Eisinberg is an associate vice president and financial consultant at RBC Dain Rauscher in Phoenix, Arizona, The opinions expressed are his and do not necessarily reflect those of the firm. RBC Dain Rauscher is a member of the NYSE and SIPC. Eisinberg can be reached at (602) 508-7863, or toll-free at (888) 5954166, or via e-mail: lee.eisinberg@rbcdain.com.

Copyright Manufacturers' Agents National Association Apr 2006
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