The Congress thought about this solution and they enacted the gift tax rules. Essentially, the gift tax rules limit the amount of gifts you can give annually and over your lifetime. If you exceed these limits, you, the giver, pay a tax. The recipient pays no taxes on gifts received.
Each calendar year, you may give $12,000 to each donee. Your spouse may also give $12,000 to the same donee. You can give more, but then you start using up that exclusion we talked about in the last section, shown in the above table. But if you want to start using your exclusion during your lifetime, it’s a little more restrictive as per the gift tax table:
|Year||Application Exclusion Amount|
|2006, 2007, and 2008||1,000,000|
|2009 and thereafter||1,000,000|
Harold and his wife, Helen, agree to split the gifts that they made during 2004. Harold gives his nephew, George, $21,000, and Helen gives her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($12,000), by gift splitting they can make these gifts without making a taxable gift. Harold’s gift to George is treated as one-half ($10,500) from Harold and one-half ($10,500) from Helen. Helen’s gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return and notify IRS that they have elected gift splitting.
Therefore, you cannot beat the estate tax by giving your money away (unless to charity).