I will bet that you are not aware that the tax code requires you to keep track of how much you give to others as a gift. If you give up to $12,000 per year to any one person, you do not owe gift tax and you do not have to file a gift tax return. If you are married, you and your spouse can each give up to $12,000 to any one person and not be required to pay gift tax or file a gift tax return.
How does this fit into your estate plans? Suppose you and your spouse have 3 children. You and your spouse each can give $12,000 to each of your children. That takes $72,000 out of your estate. If each of your children have 2 children, you and your spouse can give away another $24,000 to each of your grandchildren. So, in one year, you can reduce the size of your estate (and possibly reduce your estate tax) by $216,000 ($24,000 times 3 children and $24,000 times 6 grandchildren).
If you do this for a few years (and in 2009 you can give up to $13,000 to any one person), you can reduce the amount of estate taxes that might be due and make your children and grandchildren very happy. I do not recommend this strategy if you need the money for your own expenses or if you feel that the recipient will spend the money foolishly. You do not get a tax deduction on your income tax return unless you give a gift to a qualified charity. So that excludes your family and friends. The gift does not need to be in cash. You can give a gift of stock or other property. If you give a gift of property that can appreciate in value, you can escape estate tax on the amount of the gift as well as the appreciation in value. To give an example of this, suppose you and your spouse gift each of your 3 children stock that as of the date of the gift is worth $24,000. And suppose that the value of the stock increases over the next 5 years to $50,000. That means that not only did not your estate not have to pay estate tax on the original $24,000, but it will not be paying estate tax on the $26,000 of appreciation.
