There are many misconceptions about the gift tax.  The most popular misconception, or myth, is that you can only give away $13,000 without paying gift taxes on the transfer.  The $13,000 limit is a complete fallacy.  It’s completely untrue.

To set the record straight, we are listing 10 honest and legal ways to avoid paying the gift tax.

• If a loved one wants to study screenwriting at the local film school, pay her tuition directly to the school.  This is a tax free gift.  You can do the same if she wants to go to medical school as well.

• If a loved one needs Lasik surgery to have his eyes fixed, pay the medical fees directly to the doctor.  This is a tax free gift.

• If you have three young grandchildren, all of whom you’d like to help with college tuition, fund a 529 Plan for each child.  In the first year, you can put $65,000 into each of the 3 grandchildren’s 529 Plan.  If you have 6 grandchildren, you can do the same thing.  You can fun 529 Plans for an unlimited number of beneficiaries.

• If your daughter is getting divorced and needs a financial pick me up, you could purchase her a house or give her a down payment.  To do this, you’d be using a portion of your unified lifetime credit which this year and next (2011 and 2012) is $5,000,000.

• You can give unlimited amounts of assets to your spouse so long as your spouse is an American citizen.  No gift tax.

• You can donate unlimited amounts to charity without gift tax.

• You can take your loved ones on a trip out west to see the Grand Canyon, Yosemite National Park, and The Grand Tetons.  This is a gift using that unified credit mentioned above.  After all, you do have $5,000,000 that you can give away without gift tax.  If you’re married, you’ve got $10,000,000 without gift tax.

The bottom line is that the gift tax isn’t significant to too many people.  Be sure to consult with a qualified estate planning attorney to ensure you follow proper gifting procedures.

Co-Executor, PLLC is a member of the American Academy of Estate Planning Attorneys.

Transferring assets during your lifetime may have costly income tax consequences not present when assets are transferred at death. Be sure to consult with a qualified estate planning attorney for a full cost-benefit analysis.

If you transfer your assets during your lifetime, you will have these income tax implications:

1. Loss of any applicable homestead credit

2. Loss of any applicable exemption from the sale of a personal residence

3. Loss of step up in basis

If possible, do not gift highly appreciated assets due to loss of step up in basis

Assets transferred during lifetime, transfer the tax basis as well. Assets transferred at death, receive a step up in basis from the date of death (or 6 months later) value.

For example, Sam bought stocks in 1976 for $25,000. Today, those same stocks are worth $125,000.

If Sam gives those stocks to his daughter, Tammy, during his lifetime, Tammy receives his $25,000 cost basis.

On the other hand, if Sam gives those stocks to Tammy at his death, Tammy receives a step up in basis to the date of death value, $125,000.

Tax implications: Lifetime versus death transfers

So, if Tammy sells the stocks after receipt of the lifetime gift, she will owe capital gains taxes on $100,000. This is the difference between her tax basis transferred from Tom and the current value at sale.

But, if Tammy sells the stocks after receipt at Tom’s death, she will owe no capital gains at all.

Tax implication bottom line

In our example, if the applicable capital gains rate is 20%, Tammy will owe $20,000 in capital gains tax for assets received during Sam’s lifetime. (The long term capital gains rate for 2011 is 20%.)

If she receives those assets at Sam’s death, she owes NO capital gains taxes.

If you have questions about the affects of capital gain taxes and other income tax implications of transferring assets, consult with a qualified estate planning attorney.

Co-Executor, PLLC is a member of the American Academy of Estate Planning Attorneys.