Making gifts during your life can provide you with tax savings and more.

One way to avoid or reduce estate taxes is to give away property during your life. This does more than save on taxes -- you also get to see the recipients enjoy your gifts.

Currently, you can make an unlimited number of $12,000 gifts of cash or other property each year, completely tax-free. To ensure these tax savings, you need remember only that no individual recipient can receive more than $12,000 in a calendar year. If you left the same gifts at your death and they were subject to estate tax, the recipients would see their gifts shrink by at least 39%.

How the Annual Exclusion Works

The $12,000 annual tax exemption rule (called the "annual exclusion") is pretty straightforward. For instance, if you give $25,000 to someone, $12,000 of it is exempt from gift tax, but you must pay gift tax on the remaining $13,000.

The exclusion amount is indexed for inflation, rising in $1,000 increments as the cost of living goes up.

Couples: Double Your Exclusion

Couples can combine their annual exclusions, meaning that they can give away $24,000 worth of property tax-free, per year, per recipient. In fact, even if only one spouse makes a gift, it's considered to have been made by both spouses if they both consent. (Internal Revenue Code § 2513.)

Gifts to Your Spouse

All gifts you make to your spouse are tax-free, as long as he or she is a U.S. citizen. If your spouse isn't a citizen, the limit on tax-free gifts is currently $120,000 per year. (Internal Revenue Code § 2523(a).) However, there's seldom a reason to make large gifts to your spouse. If you each own about the same amount of property, you could worsen your tax situation by saddling your spouse with an estate that's so large it will be taxed at his or her death.

Timing Your Gifts

To make the most of the annual exemption, keep in mind that it is based on a calendar year. If you miss a year, you can't go back and claim that year's exemption amount. But if you spread a large gift over two or more years, you may escape gift tax complications. For instance, if you give your daughter $20,000 on December 17, $8,000 of it is taxable. You'll have to file a gift tax return (by April 15 of the next year), and you'll use up $8,000 of the total amount you can give away or leave free from estate tax. But if you give your daughter $10,000 in December and wait to hand over the other $10,000 until January 1, both gifts are tax-free.

Giving Away Non-Cash Property

Not only gifts of cash can be spread over several years. You can give away some stocks now, some next year. You can even give real estate in pieces -- physical pieces, if that's possible, or pieces (percentages) of ownership.

Gifts to Children

Giving children valuable property before they are adults raises the important question of who will manage the property for the child. If you give a large gift to a child under 18, an adult must be responsible for the money.

Fortunately, it's easy to arrange for an adult to manage the property, by setting up either:

• an irrevocable child's trust, or
• a custodianship authorized by state law.