The estate tax may or may not eventually be repealed in 2010, but its counterpart — the gift tax — will remain. Beginning in 2002, gifts bestowed during a person’s lifetime are treated differently from bequests at death.

The 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 are 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. The gift tax lifetime exclusion — the maximum amount you can give away tax-free while you’re living is $1.5 million in 2005.

Falling Rates

Gift tax rates on giving exceeding the annual or lifetime exclusion amount are lower today than they were last decade and still falling. The rate will be 45 percent in 2007 and 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. Until 2010, the exemption amounts will mirror those of the estate tax, before its scheduled repeal in 2010.

Strategic Changes

The subtleties of tax reform will affect the way Americans transfer wealth to their heirs. The tradition of "gifiting" stocks or other appreciatable stocks prior to ones death is likely to occur less frequently. This is because the purpose was to pay the lower gift tax rate now and avoid the higher death tax rate. As the estate tax diminishes and there is likely to be no tax due at death, it will become less advantageous to make a large gift during one’s lifetime.

In 2011, unless Congress revisits the issue, the law will prompt a reverse back to pre-legislation rates and rules. Many experts believe the future holds even more changes and uncertainty in the coming years. Be sure to consult knowledgeable tax and legal professionals about gifting strategies that work for your specific financial situation.

Roger Sorensen

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