How to shower money on family and friends - without paying gift taxes

Q: What are the yearly limits on financial gifts to children? I have been told $11,000 per year. But I have also heard that one may exceed this limit as long as any amount over $11,000 is deducted from a lifetime limit of $1 million.
- M.G., Greene, N.Y.

A: What you have heard is right, and as usual, requires further clarification.

First, "annual exclusion gifts" of $11,000 per year can be made to an unlimited number of people, whether they're related to you or not, says Howard Richards, a certified financial planner of WISE Financial, in Long Lake, Minn. Gifts can be made individually or jointly. If two individuals join in the gift, $22,000 per year can be given per person. These limits don't apply to tuition or medical expenses, provided you pay them directly to the institution providing the service.

What if you want to give a child $35,000 for a down payment on a home? This can be done free of gift tax because you have a lifetime $1 million gift-tax exemption, Mr. Richards says. If one parent made the gift, the first $11,000 would use up the annual exclusion amount, and the remaining $24,000 would count against the $1 million lifetime exclusion. That leaves $976,000 to be given free of tax in the future. File a gift-tax return to document the excess.

But before you start mailing checks to the whole family tree, consider your own future needs, how the recipient handles money, and the gift's impact on estate taxes, Richards advises.

Q: I have low-interest (5.99 percent) credit-card debt of $3,500. Does it make more sense to cash in my savings of equal value to pay off that bill or make payments of $200 for 18 months?
J.S., via e-mail

A: Brian T. Jones, a certified financial planner in Fairfax, Va., is not a big fan of liquidating cash reserves to pay off credit-card debt. Those reserves are for emergencies. An emergency fund should hold three to six months' worth of household expenses in cash. If you have cash above this threshold, then "I would not hesitate to pay off the debt," Mr. Jones says. Otherwise, pay the $200 a month.

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