Every U.S. taxpayer (donor) may gift up to $11,000 per calendar year, per recipient (donee) without the imposition of a gift tax. There is no limitation on the number of individuals that may receive an annual gift of $11,000 or less. Married couples may together make gifts worth up to $22,000 per year, per donee. Therefore, a husband and wife with three children may gift each of them (or anybody else) $22,000 per person, per year ($66,000 total).

The annual gift-tax exclusion applies to gifts of a present interest, an actual and complete transfer, but not to gifts of a future interest, such as a gift to a trust (discussed below).

The donee receives a carryover basis which is the same basis that the donor had in the property or the fair market value of the property, whichever is lower. For example, if the donor’s basis in a share of gifted stock is $40 and the fair market value is $100, the donee’s basis is $40 and an immediate sale of the stock will produces a $60 gain.

If the stock’s fair market value drops to $25 when the gift is made, donee’s basis is $25 and an immediate sale at $25 produces no gain or loss. In these circumstances, it is usually advantageous for the donor to sell the stock, recognize a $15 loss and gift the donee cash proceeds of $25.

Now the confusing part: In addition to the annual gift-tax exclusion, every U.S. taxpayer has a lifetime credit that may be applied to gift and estate taxes, although the application to gifts is limited to $1 million, even though the credit is $1,500,000 for tax years 2004 and 2005. Use of the lifetime credit becomes an issue when the donor makes a gift of a future interest or a present gift of more than $11,000 in a calendar year to the same beneficiary.

For example, assume father makes a $100,000 cash gift to his daughter during calendar year 2004. The annual gift-tax exclusion covers the first $11,000, so the excess gift is $89,000. The donor has the option of paying gift taxes on the $89,000 or reducing his lifetime credit. If he chooses to reduce the lifetime credit, the overall credit is reduced from $1.5 million to $1,411,000 and the gift-tax portion of the credit is reduced from $1 million to $911,000.

Gifts in Trust

A gift in trust is considered a gift of a future interest which means the annual gift-tax exclusion does not apply. Not to worry, attorneys have devised a method to make gifts in trust qualify for the annual gift-tax exclusion by providing the donee/beneficiary with the present right to withdraw funds transferred to the trust. Of course, along with the power given to the beneficiary to withdraw the funds comes the not-so-subtle threat that if the beneficiary actually does withdraw the funds, no additional gifts will be made and disinheritance is a real possibility.

Gifts made to a trust for the benefit of one’s children or grandchildren is a common estate-planning technique. Often, life insurance is placed in an irrevocable trust, using the annual gift-tax exclusion to fund the insurance premiums. For these trusts, in general, the beneficiary(ies) is given the present right to withdraw contributions

Adding a joint tenant to a bank or investment account is not a gift unless and until the joint tenant actually withdraws money. Joint tenancy is a form of ownership in which the last surviving tenant receives the entire property. Because the donor may withdraw the entire amount at any time, no gift occurs until the donee/joint tenant actually receives funds.