As you are probably aware, our law firm prepares retirement and estate plans for individuals with significant retirement plan accumulations. We also draft sophisticated wills and integrated beneficiary designations for IRAs and retirement plans. In addition, we give Roth IRA conversion advice. Let's not, however, forget the basics.

One of the easiest and most effective tools for reducing estate taxes is a systematic program of making annual gifts to children and/or grandchildren. Gifts will reduce the amount of your gross estate that is subject to federal tax by the amount of the gift plus the future appreciation of the gifted asset's value. Gifts can also serve a function in your income tax planning by shifting income-producing or appreciated property to others who are in a lower tax bracket. With estate tax rates as high as 55 percent, and with income tax rates ranging from 15 percent to 39.6 percent, planned gifting can yield significant benefits.

While many gifts are subject to gift taxation, you can give away up to $10,000 per recipient per year free of gift tax. These gifts also do not reduce the $650,000 exemption amount that you can pass free of estate tax. There is a great deal of flexibility in the types of property that can be transferred. Qualifying gifts can be money, property such as stocks or bonds, or even a life insurance policy, as long as the recipient gets the present right to possess or use the property. The gift may be in trust if the terms of the trust give the recipient the immediate right to the property or income from the property. If the recipient is a minor, the gift may be made to a custodian or legally appointed guardian of the minor's property under your state's version of the Uniform Gift to Minors' Act. If the recipient is a child under 14, however, income from the property may be taxed at the parent's marginal rate.

You can give up to $20,000 per recipient per year if you are married, and your spouse consents to "split" your gifts. This is useful for spouses who do not own an equal amount of property. The spouse with less property can consent to gifts made by the wealthier spouse, thereby effectively doubling the amount that the wealthier spouse can give away tax-free. To take advantage of "gift splitting," both spouses must be U.S. citizens or residents. The consent must be given on a gift tax return -- therefore, a return must be filed even if no gift tax is due. A short form gift tax return is available. For citizens who want to make a $20,000 gift to a beneficiary, I usually recommend writing the check for the gift from a jointly owned account to avoid the need to file a gift tax return.

Let's do a simple example of the long-term estate tax savings of a simple gifting program. Assume that Mr. & Mrs. Affluent have two children. Based on their assets and other income, they feel they can afford to make gifts of $20,000 per year to each of their two
children. They plan on making gifts the rest of their lives unless their circumstances change, and they feel they can no longer afford to make the gifts. Let's also assume they make these gifts for 20 years and die. If they had not made the gifts, the value of the gifts and the appreciation on the gifts would have been in their estate and taxed at 50% for federal estate tax purposes. Using a 6% rate of return, the total value of the gifts was $1,471,424 at their death. The estate-tax savings resulting from the gifting program was $735,712. It is likely that this simple gifting technique saved the family more money in estate taxes than all of the documents an attorney could draft. Making the appropriate financial moves, whether they be a gift or making a Roth IRA conversion or even making a gift that your children will use to fund a Roth IRA or Roth IRA conversion will reduce estate taxes. We encourage the proper drafting of appropriate documents as well as taking other
suitable financial steps that may include a gifting program for clients who can afford to make gifts.

There are a variety of gifting techniques. For example, creating an irrevocable trust funded by a life insurance policy is nothing more than a leveraged gift. In addition, grantor retained interest trusts (such as GRATS or GRUTS), family limited partnerships and a variety of other techniques are often useful and advisable. Most of these and other estate-planning techniques are only a variation of a gift.

One important thing to remember when you make a gift is that the recipient receives your tax basis in the property. This means that if the recipient sells the property, any gain on the sale will be measured using what you paid for the property, not what the property was worth when the recipient received it. In contrast, if property is transferred to another through your estate, the recipient can use the value of the property at that time in measuring any gain on the sale of the property. Consequently, choosing the right property to achieve your goals is an important aspect of any gift-giving program.

Another way to further the financial security of others without incurring gift tax is by payment of medical and educational expenses. You can pay an unlimited amount for these expenses on behalf of family members as long as the payments are made directly to the medical services provider or educational institution. The medical expenses must not be reimbursed by insurance. (One Word of Caution: If you pay medical or educational expenses for a grandchild, the child's parents may realize taxable income if the parents are obligated by law to pay these expenses.)

If used properly, a program of systematic giving can benefit everyone involved. If your situation is such that you cannot afford gifts on a systematic basis, consider making gifts on an "as needed" basis. Keep in mind, however, that every year you fail to make a gift, you give up your right to utilize your $20,000 per year exclusion for that year. If there are sufficient assets, it is preferable to begin a systematic gifting program and stop the program (if necessary), rather than waiting to start a gifting program sometime in the future. The opportunities lost while waiting for a gifting plan to become more convenient can never be recaptured.