Gift giving is generally looked upon as a positive thing. It would be logical assume that you can give gifts to people without being taxed for your troubles. However, the tax man takes a different approach. There is a federal gift tax, and it exists to stop people from giving gifts so that they can avoid the estate tax.
There is a federal gift and estate tax exclusion. It is alternately called a credit, and it is the amount that you transfer to anyone who is not your spouse before the estate tax would kick in (unlimited tax-free transfers between spouses are allowed).
In 2015, the exact amount of this unified gift and estate tax exclusion is $5.43 million.
If you use your exclusion to give tax-free gifts while you are living, you are reducing the amount that will be left to apply to your estate. As a result, the utilization of the unified exclusion during your life is not going to provide you with any estate tax efficiency.
Annual Gift Tax Exclusion
Using the unified exclusion during your life is not going to help you avoid the estate tax, however, there is an additional exclusion that you can use to give tax-free gifts to reduce your estate tax exposure.
There is a $14,000 per year, per person gift tax exclusion that exists apart from the unified lifetime gift and estate tax exclusion. The first $14,000 that you give to any one person within a calendar year can be given free of the gift tax.
There can be unlimited gift recipients, and there is no limit to the total amount of the tax-free gifts, as long as no more than $14,000 is given to any one individual.
You could use this annual gift tax exclusion to give tax-free gifts every year to people who would otherwise be inheriting the resources. If you are married and you are giving assets to married relatives, significant asset transfers could be made each year in a tax-free manner.
For example, let’s say that you have a married son, and you are married. You and your spouse could combine your respective exclusions and give $28,000 to your son, and $28,000 to your daughter-in-law. This is a $56,000 tax-free transfer.
The assets are getting into the hands of your heirs without any tax consequences, and the overall value of your estate is being reduced for tax purposes.
This annual exclusion could be used to give direct gifts, but people sometimes use it to fund trusts. It could also be used to distribute shares in a family limited partnership.
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Mark S. Eghrari, Estate Planning Attorney
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