Q: I have heard you speak on gifting and have also read articles that you have written on the subject. Why don't you share this information with your Coloradoan readers? I am disappointed that you have not written more about estate planning subjects.
A: Thank you for voicing your concern. Recently, I have only been given less than a half column of space every other week, so I need to touch on a variety of subjects. Readers tell me I should write more about water law, the legal and constitutional aspects of current events, estate planning and taxes, legal aspects of day-to-day life, real estate, etc. But the bottom line is that this column is driven by the questions and issues raised by the readers, and there is very little space, so I can only respond to a few of the readers. I do apologize to all of the rest of you. But here goes my response to your question on gifting.
Any transfer for less than full value results in a tax on the difference in the total value transferred by the transferor minus the value of anything received back.
A transfer made during life is called a gift. A transfer made because of death is an inheritance or estate bequest or devise.
For transfers after death, there are three major exceptions:
(1) any amount passes tax-free to a tax-qualified charity; (2) any amount goes tax-free to a surviving spouse; and (3) a total transfer of $700,000 can be given tax-free to anyone else, whether to one person or to several people, including kids. The $700,000 figure will rise to $1,000,000 by 2005. It makes no difference who the transferees are (at least for federal and Colorado purposes) or how many recipients. Anything above $700,000 will initially have a tax of about 44% (44¢ on each $1) – about 38% for federal and about 6% for Colorado.
For transfers during life:
(1) any amount can be given tax-free to a spouse (just as for inheritance); (2) any amount goes tax-free to tax-qualified charities, although unlike death transfers there are restrictions and limits that might apply, especially for current income tax deductions; (3) for all other gifts, one person can give a bit over $10,000 of value to each person (no limit as to the number of recipients or the total amount given) during each calendar year (no limit to the number of years). But all transfers must be taken into account during that calendar year to see if the total exceeds $10,000 per person. Thus in theory, grandmother's Sunday meals, birthday gifts to you, the $20 she gives you when you stop to see her, etc., all must be included to see if you received more than $10,000 from her in any given year; and (4) the $700,000 exemption for 2001 can be used during a person's lifetime and is not restricted to death only. But once used for gifting, the amount can not be used to shelter estate taxes.
For example, if someone has a taxable net worth of $810,000, it is possible to transfer $710,000 of value tax free to one person in one year. But now the remaining $100,000 is exposed to estate taxes or gift taxes. The following year another $10,000 of value can be gifted to the same recipient tax-free, but the remaining $90,000 is exposed to gift or estate taxes. Yes, as the exemption goes to $850,000, then $950,000, and finally $1,000,000, the difference between the new exemption minus what was used in the past would be available to shelter either gift taxes or estate taxes, or both as previously described.
And for those readers still with me, you probably already have anticipated my next point – the tax rate for estate taxes is the same rate for the gift tax. Thus, the "transfer taxes" all tie back into each other.
If I receive positive responses showing interest, I'll do a future column on the do's and don'ts of gifting and estate transfer and bump the columns that are waiting to be published on all the other subjects.