Q: We’d like to begin giving some of our estate away to our children. How can we do that without paying gift taxes?
A: In 2010 you can give as much as $13,000 to each of any number of individuals without paying any gift tax or being required to file a gift tax return. You can give up to that same amount annually to as many people as you wish including each of your children, your friends, or complete strangers. $13,000 is the current annual exclusion amount.
In other words, you can gift up to the current annual exclusion amount to any number of individuals evey year until the $13,000 limit is changed. Check the IRS Web site for the most up-to-date information on the annual exclusion limit. If there is a change, expect the limit to be increased.
In addition, you can also give more than $13,000 to any individual or number of individuals in a year and still owe no gift tax - up to a fixed limit. That limit for any individual making gifts is known as the lifetime federal gift tax exclusion. It is currently $1 million. If you make a gift to anyone in excess of $13,000 in a single year you must file a federal gift tax return by April 15 of the year following the year in which you made the gift although you will not owe any gift tax until you reach the $1 million lifetime exclusionary amount. Once the total of the gifts you have made during your lifetime (not counting the $13,000 annual exclusion gifts) exceeds $1 million you will have to pay gift tax along with your federal income tax on any additional gifts you make since you will have used up your lifetime gift tax exclusion.
Should you decide to make a number of $13,000 gifts you are advised to keep accurate records, or file a gift tax return (even though it's not required) in order to assure that you do not inadvertantly reduce your personal federal gift tax exclusionary amount in the eyes of the IRS.