A gift is a legal mode of transferring ownership of property. The general tax rule is that control of the asset must transfer as well as the title of ownership for a gift to be completed. For federal transfer tax purposes, a gift is a transfer of property for less than its full value and includes financing the sale of an asset using below market interest rates.
To stem taxpayers from giving away their wealth in advance of death to avoid estate taxes, gift tax rates are exactly equal to the federal estate tax rates – very high. Paying gift tax should be avoided because the federal estate tax system at least affords a step-up in basis for the estate asset; a gifted asset retains the donor’s original cost basis.
Systematic lifetime gifting is a common estate transfer technique than can significantly reduce your taxable estate and shift the value of future appreciation to the next generation. In Pennsylvania, an asset is excluded from the donor’s taxable estate one year after a gift is made and thus avoids inheritance tax. A gift to a qualified charity can generate a significant charitable deduction reducing your taxable income while avoiding any capital gain taxable income embedded in the asset.
Each taxpayer can gift a small amount each year that is not subject to gift tax as well as a lifetime maximum amount of cumulative taxable gifts that are exempt from gift tax. However, certain types of gifts are not taxable and do not count against the lifetime maximum. Examples are direct payments of medical bills or tuition (only) on behalf of a third-party.
Be sure to consult your legal and wealth management professionals to consider all the planning issues before initiating a gifting strategy.
