Preserve Your Legacy

Estate Planning | Elder Law | Special Needs Planning



High net worth families must be aware of the existence of the federal gift tax. Actually, everyone is potentially exposed to the gift tax. The reason why most people don’t pay this tax is because there are exclusions. One of these exclusions is the annual gift tax exclusion.

$14,000 Per Person, Per Year

Under currently existing laws, you can give as much as $14,000 per year to any number of gift recipients free of the gift tax. This is not $14,000 total; this is per person, per year. You could give $14,000 to everyone watching a Yankee game with you at Yankee Stadium free of the gift tax.

However, if you gave one person $15,000, the transfer of $1000 would be taxable.

Unified Gift/Estate Tax Exclusion

Though that $1000 would be taxable, you could use a portion of a different exclusion to give the gift entirely tax free. There is another exclusion that you could use that exists in addition to the annual $14,000 per person gift tax exclusion.

The federal gift tax is unified with the estate tax. The gift tax exists to prevent wealthy people from giving gifts tax-free while they are living to avoid the estate tax.

There is a unified lifetime gift and estate tax exclusion. The amount of this exclusion in 2014 is $5.34 million. We must emphasize the fact that this exclusion is something that is completely separate from the annual per person exclusion.

You don’t have to use any of this exclusion until and unless you give a gift to someone in excess of $14,000 during a calendar year.

Marital Deduction

It should be noted that you do not have to use any of your annual exclusion or unified lifetime exclusion to give a tax-free gift to your spouse if you are in fact married. There is an unlimited marital deduction that allows you to transfer any amount of money to your spouse free of taxation. This applies to lifetime gifts, and it also applies to the value of your estate when you leave your spouse an inheritance.

Combining Annual Exclusions

While we are on the topic of spouses, you should understand the fact that your spouse has a $14,000 annual gift tax exclusion. You have your own annual $14,000 gift tax exclusion. If you combine the two, as a couple you could give as much as $28,000 to an unlimited number of gift recipients every year tax-free.

If your assets exceed the amount of the estate tax exclusion, you would naturally be looking for ways to transfer assets in a tax-free manner. The utilization of this annual gift tax exclusion could be part of the plan.

If you make measured divestitures over a significant period of time utilizing this annual gift tax exclusion, you can transfer assets tax-free to people who would otherwise be inheriting them. At the same time, you would be reducing the taxable value of your estate.