Taking advantage of the annual gift tax exclusion

We wanted to share some facts with you regarding a small yet powerful tool — the annual gift tax exclusion amount.

The annual gift tax exclusion is a handy way to reduce your federal estate tax liability over time. The annual gift tax exclusion currently allows you to give $15,000 to an unlimited number of people in one year without having to report the gift on a gift tax return. For a married couple, they could each give $15,000 thereby doubling the gift to $30,000 per recipient. From time to time the exclusion amount changes to keep pace with inflation.

The annual gift tax exclusion is important because it allows you to:

  • Distribute your property without reducing your total lifetime gift/estate tax exemption amounts
  • Potentially put your taxable estate into a lower tax bracket by removing assets from your estate

A little background on the gift and estate tax

Current laws allow people to transfer a set amount of assets to others without incurring a gift or estate tax. The current set amount is $11.58 million per person. If you exceed that set amount at any point during your life or upon your death, the amount gifted above the threshold is subject to a gift/estate tax.  If you transfer assets in an amount that exceeds the annual gift tax exclusion amount (currently $15,000), then you must file a gift tax return to track those gifts.  And once you hit the limit during your life OR upon your death, the tax man will come.

The amount of the lifetime exclusion will change over time based on legislation. It was around $5 million just a few short years ago, and there is talk that a new tax package in the near future could see the exclusion amount drop back down to $5 million or possibly even below that.  Taking advantage of the annual exclusion gifts can be an effective way of managing the overall size of your estate to help plan for whatever the lifetime exemption amount might be.

The power of annual gifts

Even if you don’t maximize the gift amount each year, the cumulative effect can be great. If the recipient of the gift doesn’t spend it right away, the growth of the assets over time can result in a future nest egg for your loved ones.

If you have a sizable estate and are motivated to reduce it, maximum annual exclusion gifts can be a good strategy.  If a married couple had 3 kids, all married, and 8 grandchildren, they could gift the kids, spouses and grandchildren for a total annual gift of $420,000!  This example shows how leveraging annual gifts can be a powerful way to move sizable sums of money from generation to generation without the burden of a gift tax during life or an estate tax upon death.

A few specifics to remember

Keep in mind that the gift must be a present interest in property, which means the recipient has the unrestricted right to the immediate use, possession, or enjoyment of the property, or income from the property from the moment the gift is given. The exclusion is not available to gifts of future interests in property.  You can use trusts as vehicles for these gifts, but certain guidelines must be followed. Work with your advisors to ensure you are in compliance with this one.

As a caution, personal checks that have not been cashed at the time of your death do not qualify for the exclusion. If you are making gifts of personal checks near your death, be sure to have the recipients cash the checks immediately or to give the recipients cashier’s checks instead of personal checks.

You likely don’t need to file an annual gift tax return with respect to gifts that are under the annual exclusion amount.  As always, contact your legal and tax professionals to ensure your understanding of these topics prior to making gifts.