Inter Vivos Giving

Many people simplify their estate planning by giving away portions of their property during their lifetime, which is referred to in law as inter vivos giving. The Latin term "inter vivos" means during one's lifetime. This form of giving can be a very shrewd financial move that serves a number purposes, including reducing or avoiding estate taxes, ensuring that your property goes to those that you want to receive it, and increasing your eligibility for government assistance should you become incapacitated by age or illness. Inter vivos gifts can also provide tax benefits during your lifetime.

According to the IRS, any person may give any other person a gift with a total value of up to $12,000 (as of 2006) in one year without being subject to the federal gift tax. Therefore, if you desire to distribute your estate among different individuals, a wisely planned inter vivos gift-giving strategy can actually transfer a quite substantial amount every year. For example, two parents of four children may transfer $12,000 to each of the four children each year. If all of the children are married and the respective gift is made to each child and his or her spouse, the value of the gift can reach up to $24,000, since $12,000 may be given to each individual. So, if the four children are married, the parents could transfer up to $96,000 per year in assets to their children and sons- and daughters-in-law.

As an additional example, a man who owns a house valued at $60,000 may transfer the deed to the home to his son, and then take back a mortgage on the property. In other words, he has loaned his son the money to buy the house. Now, for each of the five years following the deed transfer, he can "forgive" $12,000 owed on the mortgage. At the end of five years, the title to the house will be legally vested in the daughter, and the father will have avoided the gift tax because he actually only gave his son $12,000 per year.

Caution, however, must be exercised. In calculating federal estate taxes, the value of any nonexempt gift (an amount over and above the exemption) completed at any time during your life, minus any gift tax paid on it, must be included in the total value of your estate when you die. Therefore, if you plan to give someone a gift worth more than $12,000, it would be wise to seek the advice of a tax accountant or other professional in order to gain a clear understanding of how it could impact both your present gift-tax obligations as well as your future estate-tax bill.

In addition to the $12,000 annual exclusion for gifts, other tax exemptions may apply in certain circumstances. For example, gifts made to your spouse or a charitable organization, tuition paid directly to a student's school, or medical expenses paid directly to a patient's doctor or hospital are generally exempt from gift tax. There are, of course, some limitations. Furthermore, a gift that is considered "incomplete" under the law is not taxable. In other words, if you retain the right to have the property eventually returned to you or the right to name other people to share in the gift, the gift is not complete and therefore not subject to tax.