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Gifting – Annual Exclusions, Lifetime Exemptions, and Gift Tax

Unlimited Tuition and Medical Gifting

Additional Excludable Gifts

In addition to the $13,000 annual exclusion amount, unlimited gifts can also be made in the form of tuition or medical expenses, tax free. The gifts can be made on behalf of anyone you choose (not just family), as long as the payments to be excluded from the tax are paid directly to the health care provider or educational institution (IRC Section 2503(e)). These payments are then excluded from both the gift tax and the generation skipping transfer tax.

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Crummey Trusts

The Crummey Trust (Involving Multiple Beneficiaries)

Crummey Recap

The purpose of the Crummey trust is to enable people to gift into a trust and receive the annual gift tax exclusion, while still enabling the gifts to be held in trust for the beneficiary rather than being given to them outright. The trust accomplishes this by giving the recipient a certain amount of time (at least 30 days) to take immediate control of the gift; if the recipient chooses to let this time period lapse, the gift remains in the trust. Because the recipient had the chance to take control of the gift, the gift qualifies as a present interest, and can therefore qualify as part (or all) of the donor’s annual gift tax exclusion amount. When the trust has only one beneficiary, this becomes a great way to gift into a trust without having to pay the gift tax or using up any of your $5 million lifetime exemption amount. However, if the trust has more than one beneficiary, the issue becomes more complicated.

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Gifting to Children: UTMA and 529 Plans

UTMA Account

A UTMA account is a custodial account created in a minor’s name, but administered by a custodian until the minor reaches the age of majority. Once the minor reaches age 18 (unless receipt of the account is delayed to age 25), control of the account passes to them completely, so they are free to use the money however they choose.

529 Plan

A 529 account, on the other hand, is used only for higher education, and is owned and administered by the person who created it; the minor is the beneficiary. This means that control of the funds does not pass to the minor it was created for, even after they have become a legal adult.

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Annual Gift Tax Exclusion

Gifts and the Gift Tax

What is a gift? For IRS purposes, a gift is a transfer of property for less than its full value, and is potentially subject to federal tax. This is the gift tax. The gift tax exists to prevent people from circumventing the estate tax by giving away all their money or other assets (i.e. “gifting” their money) right before they die. It is important to note that the tax is owed by the giver of the gift, not the recipient.

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Crummey Trusts

The Crummey Trust (Involving One Beneficiary)

Trusts and the Gift Tax

Many people choose to make monetary gifts to their children in order to save on future estate taxes. As long as the parent gives the child no more than the annual gift tax exclusion amount ($13,000 in 2011), the gifts will be excluded from both gift and estate taxes. Normally, gifts to minors are subject to parental control until the child reaches the age of majority (18 in California), after which the child would obtain access to all the money. However, many parents feel that age eighteen is still too young an age to be able to handle such money wisely. In order to delay transfer of the funds to the child beyond the age of eighteen, the funds must be placed in a trust.

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