Helping Friends and Family Financially Without Gift Tax Consequences

Giving financial help to family and friends can eat away at your current $5 million gift and estate tax exclusion. If your monetary gifts to friends and family exceed this limit, you or your estate could end up paying up to 35% on gift and estate taxes for any excess amount. Six ways to avoid paying gift or estate taxes while still helping friends and family in need are below:

1. Use the $13,000 annual exclusion to give each individual friend and family member $13,000 in cash or assets tax-free (couples can give each individual $26,000 tax-free by combining their exclusions)
2. Pay a friend or family member’s medical, dental, or educational expenses directly to the provider
3. Establish a Section 529 education savings plan for each relative you wish to benefit—these plans use up a portion of your annual exclusion, but the assets grow and can be withdrawn tax-free
4. Allow someone to live in your home or a house you own rent-free (so long as the fair market value of the rent does not exceed the annual exclusion limit) 
5. Hire friends and family and rreasonably compensation them for their services
6. Loan money to family members and charge the applicable federal rate (a minimum rate of interest the Treasury sets each month)

See Deborah L. Jacobs, 6 Ways to Give Family and Friends Financial Aid, Forbes, Aug. 22, 2011.