Yes, Virginia, there is a gift tax. That mere fact is hard to swallow. Imagine having to pay a tax because you give money away. It sounds like a Chance card from Monopoly.

The gift tax is a sister to the estate tax. When the estate tax was put in place, it didn't take long for folks to realize that if you gave everything away the day before you died, there would be no estate and hence no estate tax. The gift tax was enacted to make sure that the government gets its cut when property passes to the next generation or other intended beneficiaries.

There is an annual exclusion from the gift tax which is currently $13,000 per donee per year. Many are under the impression that this $13,000 is all they are "allowed" to give. Not so.

$13,000 per donee per year is the limit for making gifts and not filing a gift tax return. Note that I said filing a gift tax return, not paying a gift tax. In addition to the $13,000 annual exclusion there is also a life-time exemption from the gift tax. For 2011 and 2012, the exemption is $5 million. That means you can make gifts up to $5 million before you have to pay any gift tax. Any exemption remaining when you die can be used as an exemption from the estate tax.

The purpose of filing a Gift Tax Return, Form 709, is to keep track of how much of the $5 million exemption you have used. Let's say you give your son $100,000. $13,000 qualified for the $13,000 annual exclusion. You have made a taxable ("taxable" not "taxed") gift of $87,000.
Reporting that gift on Form 709 will show that you now have $4,913,000 of your lifetime exemption remaining to be used.

In addition to the $13,000 annual exclusion and $5 million exemption, you can also pay tuition and medical bills for your beneficiaries, in any amount, with no gift tax consequences so long as the payments are paid directly to the provider of services. You don't even have to file a return. Pay that $45,000 tuition directly to the college or university. It doesn't use up your $13,000 exclusion for that student, no gift tax return is required, and none of your lifetime exemption is used.

If the only gifts you made during the calendar year qualify for the annual exclusion you do not have to file a gift tax return. If a married couple made gifts in 2011 of more than $13,000 - anywhere from $13,001 to $26,000, it is possible for the married couple to double the annual exclusion. There is a catch, however. If more than $13,000 came from either spouse, then in order to double the exclusion, a gift tax return must be filed; and the spouses must elect gift-splitting.

Many taxpayers and tax preparers are unaware of this requirement. For example, let's say Mom and Dad give Junior $26,000 for a down payment on a house. If Mom gave him $13,000 and Dad gave him $13,000, both gifts qualify for the annual exclusion; and no gift tax returns need be filed. If Dad gives the whole $26,000, then gift tax returns must be filed; and Mom and Dad must elect gift-splitting in order to get two annual exclusions.

What if the gift is made from Mom and Dad's joint checking account and Mom writes a $26,000 check to Junior. Then do Mom and Dad have to file a gift tax return? The answer is "yes." Either Mom or Dad is permitted to make withdrawals from or write checks on a joint account. Whoever signed the check is the one making the gift. If the check signed by Mom was for more than $13,000, then Mom and Dad must file a gift tax return and elect gift-splitting in order to use both spouses' annual exclusions.

What happens if they don't file? The amount of the gift that exceeds the annual exclusion uses up part of the available exemption from gift and estate tax. If Dad writes a $26,000 check on a joint account, and Mom and Dad do not file gift tax return in order to elect gift-splitting, then only Dad's $13,000 annual exclusion is used. The rest of the gift uses $13,000 of the $5 million exemption, leaving $4,987,000 available.

For a gift to qualify for the annual exclusion, it must be a gift of a "present interest." That is, the donee's enjoyment of the gift can't be postponed into the future. For example, if you put cash into a trust and provide that your grandchild is to receive the trust property at age 30, the grandchild's interest is a "future" interest. Gifts to that trust don't qualify for the annual exclusion and use part of the $5 million exemption.

Gifts for minors made either to a Custodian under the Uniform Transfers to Minors Act or to a Section 529 plan qualify for the exclusions. The new ceiling for a lump sum transfer to a 529 plan is $65,000 ($13,000 x 5). After five years, additional annual exclusion gifts can be added to the 529 plan.

The most basic reason for estate planning is to provide for those you love, and gifts are the simplest estate planning technique. They are easy to understand and easy to implement. Keep in mind the goals of all tax planning: lower taxes, higher future wealth.