With an eye toward reducing their potential federal estate tax, Malcolm and Helen began reviewing their estate plan. As they discussed options with their estate planning attorney, they learned about the annual gift tax exclusion. The Annual Gift Tax Exclusion According to current IRS guidelines, individuals may make gifts of up to $15,000 per person (as of 2018) every year without incurring any gift tax. This is called the annual gift tax exclusion. In fact, spouses may each make $15,000 gifts per person every year. When Malcolm and Helen wanted to help their daughter and her husband buy a house, they were each able to give the daughter and her spouse $15,000 for a total of $60,000. Any gifts over and above the exclusion amount must be reported to the IRS on Form 709, the United States Gift (and Generation-Skipping Transfer) return. Amounts listed on this tax form are counted against the taxpayer’s lifetime exemption. The Lifetime Exemption Due to the 2017 tax reform, a taxpayer’s estate is free from federal estate tax unless its assets are valued at more than the lifetime exemption of $11.18 million (as of 2018, set to increase to $11.4 million in 2019). As your estate is settled, gifts that exceeded the annual gift tax exclusion are totaled. The IRS applies the total to the lifetime exemption. If your estate and the total of your excess gifts is greater than the current lifetime exemption, your estate will owe federal estate tax. The IRS Definition of “Gift” When we think of estate planning strategies that involve gifting, we probably think of cash gifts only. However, the IRS considers almost any transfer of property to be a gift as long as the giver does not receive anything in return. For example, Malcolm gives his daughter a rare book worth $30,000. This gift counts toward the annual gift tax exclusion. Since this exceeds the current exclusion amount, Malcolm will declare the gift on his tax return. This, in turn, will be deducted from the estate tax exemption amount of $11.18 million. Some “gifts” are not considered taxable. For example, Malcolm pays his daughter’s tuition or medical bills. Although he is giving her something of monetary value, this type of gift will not cause any tax headaches for Malcolm. Likewise, gifts Malcolm makes to Helen, as his spouse, are not considered taxable. Will Gifting Be Part of Your Estate Planning Strategy? Thoughtful planning and advice from an attorney who understands the annual gift tax exclusion can make a difference to your family. Attorney John Mangan is board certified in Wills, Trusts & Estates by the Florida Bar. Please call us at 772-324-9050 or use our Contact Form to set up an appointment. We help clients throughout Florida, including Stuart, Palm City, Hobe Sound, Jupiter, and Port St. Lucie.
