annual gift tax exclusion
Benefits of the Annual Gift Tax Exclusion & How to Use it Correctly

One of the biggest planning mistakes and oversights we see is not using the annual gift tax exclusion by clients to reduce their taxable estates upon death.

The annual gift tax exclusion is a $14,000 gift of cash or property that can be made to someone without either party paying any federal gift tax.

The gift can be made to as many people as the client wishes, hence a grandparent with five grandchildren can gift a total of $70,000 ($14,000 to each grandchild) without any of them having to pay taxes.  The annual exclusion is doubled to $28,000 for married couples. The gift can also be made directly to educational institutions to pay for tuition or health care providers to pay for medical expenses.

The annual gift tax exclusion is one of the most underused estate planning tools.  Clients are reluctant to part with the cash or property.  But the benefit far outweighs the cost because also of the reasons listed here.  The biggest benefit the annual exclusion provides is that it is one of the easiest ways to transfer amounts on a tax free basis.

Let’s continue with the example above, also let’s assume the grandparent is married.  The grandparents can now gift $140,000 to their grandchildren on a yearly basis: $28,000 to each of the five grandchildren. With the doubled exclusion amount for married couples.  The gifts can be used towards possibly funding college educations by those grandkids, or maybe starting a business.  If the grandparent’s estate was $11,000,000 in total assets, they would be facing an estate tax bill on about $140,000 of the assets; $10,860,000 lifetime exemption amount between the grandparents for 2015.

With the annual gift tax exclusion, just making the gifts for one year would bring the grandparents under the estate tax threshold. Also, their estate would not have to pay taxes at death. And neither party would pay taxes when the gift is made yearly.