Advantages and Disadvantages of a Lifetime Giving Program

A lifetime giving program offers many tax and non-tax advantages and disadvantages.

The Advantages of Lifetime Giving Include:

Each year a donor can give $10,000 to an unlimited number of donees free of gift tax. This offers a tremendous opportunity to save estate, income and GST taxes.

An individual can pay tuition for any number of relatives or friends without the payments being treated as gifts. This offers a great opportunity to save estate and GST taxes.

Payment of another's medical expenses is not subject to gift tax and may save estate and GST tax.

Gifts offer a way to save estate tax as discussed in separate points throughout this list.

The first $675,000 of taxable transfers is exempt by virtue of the Unified Credit. This allows the donor to transfer assets with appreciation potential and to remove post-transfer appreciation and earnings from his estate.

A gift by one spouse can be treated as made by both spouses. This enables a spouse without adequate funds to take advantage of exclusions, the unified credit and other tax benefits.

Unlimited amounts can be transferred to a spouse free of gift tax. This enables a spouse without adequate funds to take advantage of exclusions, unified credit and other tax benefits. It also permits transfers to spouse for non-tax reasons (e.g., to put property beyond the reach of creditors) to be made without tax cost.

Income earned on, and appreciation in the value of, gifted property generally escapes estate tax in the donor's estate.

A giving program offers the opportunity to save family income taxes.

Any federal gift tax paid on a gift is removed from the estate tax base, unless the donor dies within three years.

Gifts avoid the publicity and probate costs on the gifted property and on any gift tax paid on the property.

Gifts may reduce the family state income tax bill.

Gifts may lower state death taxes that could arise on the donor's death.

Gifts of certain types of property may enable the donor's estate to qualify for special use valuation.

Gifts of certain types of property may enable the donor's estate to qualify for special redemption treatment.

Gifts of certain types of property may enable the donor's estate to qualify for estate tax deferral.

Gifts may place property beyond the reach of creditors.

Depending on the type of property involved, a gift may relieve the donor of the burden of managing the property.

Gifts to charity may be made free of gift tax and may produce an income tax deduction.

Gifts of certain types of property may reduce the donor's alternative minimum tax liability.

Potential Disadvantages of Lifetime Giving Include:

A donee generally gets the donor's tax basis in the gifted property. On the other hand, in the case of a transfer at death, the transferee gets a tax basis equal to the property's fair market value at the date of death or, if elected, the alternate valuation date.

Once the unified credit is used up, taxable gifts amount to a prepayment of estate tax. Still, if the gifted property has significant appreciation potential, the prepayment may be more than offset by the subsequent appreciation that escapes transfer tax.

Lifetime gifts of closely held stock could cause loss of special Code Secs. 303 redemption treatment.

Lifetime gifts of business assets could cause loss of special use valuation.

Lifetime gifts of business assets could cause loss of estate tax deferral.

Extremely complicated rules could come into play when junior equity interests in a family business are given away.

A donor ordinarily will lose control of the gifted property.

A donor ordinarily will lose income from and enjoyment of the gifted property.

The gift may place the donor in a position of lacking sufficient resources if unanticipated needs arise.

Gifts may cause the donee to become financially dependent on the donor.