Most of us don’t have to worry about the federal estate tax or gift tax. In 2016, the lifetime gift and estate tax exemption is $5.45 million. Thus, any taxpayer while alive may give, and at death, devise, or bequeath, up to $5.45 million before any federal tax liability is created. This exemption is double for married couples, which means that a married couple can gift or leave a total of $10.9 million that will be exempt from federal estate and gift taxes.
For the few lucky enough to have to worry about this tax, one of the most valuable ways of avoiding it is the annual gift exclusion. You can make the gifts during your lifetime; you just have to keep track of them as they count against the eventual estate tax exemption amount. So a woman who set up a trust for her kids with $5 million a few years ago could make new gifts to add to the trust and bring it up to the $5.45 million amount.
The $14,000 annual tax exemption (“annual exclusion”) allows taxpayers to annually make gifts up to $14,000 per recipient without incurring any tax liability. Like the lifetime exemption, couples may double this exclusion to $28,000. Even if only one spouse makes a gift, the IRC considers it to be a gift from both spouses if both consent. Internal Revenue Code § 2513. Thus, if a couple wanted to assist an adult child and his or her spouse, they could make annual tax-free gifts of up to $56,000 without incurring any tax liability.
The annual exemption is based on a calendar year but taxpayers may not go back in time and claim a prior year’s exemption amount. Enlisting the assistance of a knowledgeable tax professional can help plan any gift transfers and maximize the exclusion in every tax year. As an example, rather than giving $22,000 at one time to a son or daughter, it is much wiser to split the gift into two installments of $11,000 (or one payment of $14,000 and one payment of $8,000) gifted over two years. The former scenario yields a gift tax of $8,000 while the latter yields no gift tax whatsoever.
If you give a gift that’s larger than $14,000, only the excess will count toward the lifetime exemption. You’ll be required to fill out IRS Form 709 to report the gift, but no taxes will be due. Rather, the taxable amount of your gift will be added to the value of your taxable estate after your death.
Taxpayers may not only make intermittent gifts of cash, but also real and personal property.
In fact, real estate may be given away in physical pieces, if possible, or in shares (percentage) of ownership.
Gifts between spouses are tax-free provided that the spouse receiving the gift is a U.S. citizen. If not, the limit on tax-free gifts in 2016 is $148,000. (Internal Revenue Code § 2523(a)). 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.
To qualify for the annual exclusion from gift tax, the recipient must receive the property outright by age 21. Thus, any custodianship must end when the recipient turns 21. Similarly, for any trusts, the trust document must state that the property will be transferred outright to the recipient by his or her 21st birthday. Recipients may be given the right to extend the trust. If the recipient dies before age 21, the remaining property must go to the recipient’s estate or to some named designee. (Internal Revenue Code § 2503(c)).
For example, assume a taxpayer has an estate worth $7 million. Based upon the current exemption, $1.55 million of the estate would be considered taxable if passed on at the present time. The taxpayer could then use the annual gift tax exclusion to start giving money away now. If there are, four children (all of whom are married) and four grandchildren, that’s a total of twelve people – including spouses – that you can give $14,000 each year, tax-free. That’s a total of $168,000 each year, or $1.68 million over the course of a decade, that the IRS can’t tax and won’t count against the lifetime exclusion. In the above example, this individual would have reduced the value of his or her estate to the point where it was less than the lifetime exemption.
An ambitious program of gift-giving is not for everyone. If parting with assets makes you feel vulnerable or fearful that you will someday be without money that you need, consult a knowledgeable tax professional. Or you may decide that your children or grandchildren are not ready yet to appreciate your generosity. Call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704. Have a great holiday!
