BETTEN, MURPHY & WEISS
Attorneys, PA

Ways to Give more than $12,000.oo per year

Don't be afraid of gift taxes! The federal government imposes a gift tax on money you give away. You pay the tax (not the recipient) and are responsible to report the gifts to the IRS. There are several exceptions, however:

1. You can give up to $12,000.oo a year under the Per Donee Exclusion (PDE). Anyone can give another person up to $12,000 per year, without paying a gift tax and without reporting the gift to the IRS. You can do this for as many people as you’d like, so giving $12,000 to each of your siblings, children or even your lawyer is legal.

Starting in 1999 the annual exclusion could increase because it will be indexed for inflation with the same cost of living allowance used to calculate Social Security increases. But any increase will be rounded down to the nearest $1,000. Hence, if the index is up by 3% in 1999 (setting the unadjusted exclusion to $10,300) the exclusion really stays at $10,000 for that year since it is rounded down to the nearest $1,000. With inflation staying low, it may be 2010 or later before we see the gift tax exclusion jump up to $13,000.

2. You can gift a larger amount and use your lifetime "unified credit" to eliminate the gift tax. You are allowed to give away up to $1,000,000.oo (2006 figure) without tax, either by gift or by inheritance. However, the IRS keeps track of these gifts and you must file a gift tax return to inform them of the transfers.

3. You are allowed to pay a person’s medical bills regardless of how much money you spend. However, the money must be paid directly to the medical provider. It cannot be given to the the donee to pay bills directly. This is a good idea, since it may not be wise to trust others with the money.

4. You can pay college tuition for another person without any dollar limits. You must follow several special rules:

A. You can only pay tuition. Any gift you give to help pay for room and board, transportation or entertainment will count against the $12,000.oo PDE for that person.

B. You must pay the tuition directly to the school or college. You cannot present the money to the donee directly, expecting them to pay the tuition. If the funds are paid to anyone but the school, you might owe gift tax.

C. The donee must be a student at a "real" school that has a full time faculty and has regularly enrolled students. If the school is not a fully functioning educational institution, then you cannot use this exception to shift money.