Chapter 22: Tax Planning 102
The Benefits of Living Gifts and Life Insurance

Malcolm and Genevieve were pretty well off, but not so well off that they could easily afford to send all three of their children to the expensive private colleges they wanted to attend. One of the two sons also had tentative plans to attend to law school. His twin sister’s high grades in science and illegible handwriting clearly marked her for medical school. But the parents had planned ahead and made down payments on their children’s education. They used prepaid tuition for their daughter’s college education at an Ivy League school and other tax-free education savings plans to finance the other college and graduate school tuition.

They also made gifts each year to help Genevieve’s sister, who had muscular dystrophy, through some of her medical bills. And they made substantial gifts to organizations trying to find a cure for the condition. Years later, when they died, with their son (the trial lawyer) and their daughter (the radiologist) at their side, all their relatives were able to benefit from life insurance that passed to them free of estate taxes, and very little of their wealth went to the taxman.

Some of the most effective tax planning involves making gifts while you’re still alive. Not only will the gifts themselves escape taxation if they comply with legal limitations, but any appreciation in value after the gift is given will also escape taxation. All this obviously saves money for your beneficiaries that would otherwise go to taxes. By giving while your still alive your beneficiaries also get the chance to express their appreciation for your generosity – and you get the opportunity to see it at work.

If made properly, many gifts may escape taxation under current law. As we saw in the previous chapter, trusts can help a married couple take advantage of both of their unified credits (exemptions). If their combined estates are large enough to still face taxation, even considering the trusts, then a structured gift-giving program may help them reduce their estate to the tax-exempt level.

Current law allows you to give up to $12,000 worth of assets per person per year ($24,000, if a couple makes the gift) to as many people as you wish before the gift tax applies.

There is no gift tax on any gifts made between spouses in any amount (assuming that the recipient spouse is a U. S. citizen), nor on gifts to charitable organizations. You can also make certain tax-free, direct payments of tuition and medical expenses. These payments must be made directly to the institution involved, and not given to the individual for him or her to make the payments. These payments can be in addition to gifts made directly to the recipient, which are tax-free if $12,000 or less per year. We briefly discuss each of these options below.