Tax Reform and Gift Strategies

The estate tax may eventually be repealed in 2010, but its counterpart —  the gift tax — will remain indefinitely. Until now, the tax code relied on a  unified system of gift and estate taxes. In 2002, gifts bestowed during a  person’s lifetime will be treated differently from bequests at death.

The following adjustments in transfer tax rates and exclusion levels could  affect the tax planning of those who want to transfer their wealth to others while they are living.

Lifetime Limit
Taxpayers will still be able to give away $11,000 per year per person to whomever they want without paying gift taxes. This annual exclusion also applies to spouses, who may also give $11,000 for a joint total of a $22,000 to each person. However, the gift tax lifetime exclusion — or maximum amount you can give away tax-free while you’re living — will increase to $1 million in 2002.

Falling Rates
If you would like to give more than the annual or lifetime exclusion amount, you will notice slightly lower gift tax rates in the next decade. The top gift rate will drop gradually from 50 percent in 2002 to 45 percent in 2007. It will fall again to a top rate of 35 percent in 2010, equal to the top individual income tax rate.

The generation-skipping transfer tax is a 55 percent tax on gifts to grandchildren or others more than 37¹/2 years younger than the giver. For the next eight years, the exemption amounts will mirror those of the estate tax, before its scheduled repeal in 2010.

Strategic Changes
The subtleties of tax reform could affect the way Americans transfer wealth to their heirs. For example, one traditional estate strategy is to “gift” stocks or other assets that are likely to appreciate. The goal is to pay any gift tax while the value is low and avoid the higher tax rates of a future estate transfer. But as the estate tax fades away, it will become less advantageous to make a large gift during one’s lifetime, especially when no tax may be due upon death. In 2011, the law will prompt a reverse back to pre-legislation rates and rules, unless Congress revisits the issue before then. Many experts believe the future holds even more changes and uncertainty. And that makes it a good time to consult knowledgeable tax and legal professionals about gifting strategies that work for your specific financial situation.