A gifting program seeks to reduce the size of the donor’s estate through continued giving in amounts that do not trigger a gift tax. Currently, the annual exclusion for gifts is $13,000 per individuals (indexed for inflation). That means that an individual can give $13,000 to as many people as he or she chooses without triggering a gift tax. A married couple that elects to split gifts can give up to $26,000 to an individual without triggering a gift tax. An example would be Grandpa and Grandma who are in a taxable estate (over $5.12 million each). They can give $26,000 to their children, friends, etc. each year thus reducing their estate. If they gave to 20 people, they could effectively reduce the size of their estate by over a half million dollars without having to pay any gift tax. Further, the gift to the individuals would not be taxable to them either. For high net worth individuals, it would take several years to reduce their estate enough to not be taxable. Further, in order to see a benefit they would have to provide gifts to a large group of people rather than just focusing on few people they would like to provide for.
There are two major pitfalls in a gifting program. First, making sure that they do not exceed the annual exclusion. Maybe Grandpa and Grandma give $26,000 to their son at the beginning of the year. Then a gift on their birthday and perhaps a present during the holidays. These other gifts would be above the annual exclusion and thus taxable. Imagine the headaches if this was the situation for all 20 people in the gifting program. Most estate planning attorney suggest that the gifting program not reach the total amount of the annual exclusion. Thus, leaving room for the other gifts.
Second possible pitfall is that client not adhering to the gifting program. Maybe they forget one year, or decide to not give to a certain individual for that year. Then the they have lost that opportunity and once the year ends, that annual exclusion is gone.
With any kind of plan like this, it is best to consult an attorney because other issues may arise that affect a gifting program. Perhaps other alternatives exist that can more effectively accomplish the goals of a gifting program (such as a gifts to charities or other devices).