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Barney McKenna & Olmstead, P.C.
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How To: Lifetime Gifts


“It is better to give than to receive.” The sage who coined this phrase was speaking in terms of the good we can do by making gifts. Following this same advice can lead to tax-savings as well. However, it is important to “look before we leap.” Careful examination of both personal and tax considerations should be made before embarking on a course of lifetime gift giving.

Gifting is a strategy that is often suggested by estate and financial planners to those with the largest estates. Perhaps the most significant advantage is that federal estate taxes and probate costs will be reduced because the gifted property is no longer part of your estate.

In addition, income tax savings are also possible through the use of lifetime gifts. Although certain provisions of the tax law restrict your options, you can still achieve income tax savings by giving income-producing property to those in lower tax brackets. For instance, if dividends from your stocks are taxed to you at 35 percent, you can pocket 25 percent more by giving the stock to a family member who is in the 10 percent tax bracket.

Making lifetime gifts allows you to see how the recipient manages the property or money. This may help you decide whether later gifts should be made outright or in trust. Also, lifetime gifts need not become part of the public record like gifts made under a Will.

Last, but not least, are the advantageous rules that make certain gifts nontaxable. The basic rule is that anyone can give up to $15,000 in money or other property each year, to any number of parties, with no gift tax. This $15,000 per year, per recipient, rule is known as the “annual gift tax exclusion.” Gifts between spouses, regardless of amount, are also nontaxable. So, too, are certain tuition and medical expenses that you may make on behalf of another.

While gifting obviously has its advantages, it has its disadvantages as well. Initially, in order to achieve the advantages of gifting, you must relinquish all controls over the gifted property. Gifts must be made with no strings attached. Gifting can also have an impact on your eligibility for nursing home medical assistance.

Perhaps the most significant tax disadvantage of gifting is the loss of the so-called “stepped-up” basis. This can be best explained by an example. Let’s say you purchased unimproved land for $10,000 but the land is now worth $100,000. If you sell the land, you would realize a $90,000 taxable gain. If you were to make a lifetime gift of this property, the recipient would stand in your shoes and would also realize a $90,000 taxable gain if he or she were to sell the property. If, however, you were to bequeath the property in your Will or Revocable Trust, your beneficiary would receive it as if he or she paid $100,000 for it. As such, they could, in turn, sell it for $100,000 and realize no taxable gain. Because of this “stepped-up basis” that a decedent’s beneficiaries receive, it is suggested that a donor refrain from gifting appreciated property. The decision to make significant gifts involves consideration of many factors. If you have the inclination or the need to institute a gifting program, you should speak with your financial advisor or estate planning attorney to determine whether it is truly better to give than to receive.