Lifetime Gifts

Individuals can give specified amounts of cash or property annually to any number of donees. The amount that can be gifted is determined by the annual exclusion.

Married couples can take advantage of a provision called gift splitting. Gift splitting lets a couple give up to double the annual exclusion amount. Each spouse is assumed to give half of the gift, regardless of the true proportion given by each. These lifetime gifts do not incur gift taxes. However, individuals must file federal gift tax returns, even though no taxes may be due.

Any two people can exchange gifts. In most cases, people give gifts to children and grandchildren, which means that portions of the inheritance are distributed early and are of greater value. Because that money is no longer in the estate, the decedent avoids paying estate taxes on both the property and all appreciation earned on the property after the gift is made.

Gifts retain the donor's basis in the hands of the donee. This can have substantial income tax and estate tax implications. See the explanation of basis for more details on the income tax ramifications of different types of property transfers.

Qualifying gifts given to a spouse during lifetime or by death or marital transfer are exempt from gift and estate taxes. A qualified gift is generally one that would be includable in the spouse's estate if the spouse retained the property until death.