‘Tis still the season of giving. Thanks to a $5 million lifetime gift exemption starting in January, most of your gifts will have very little impact, if any, on your estate plan. However, today we will discuss why you perhaps should not ignore gift tax issues just yet.
Let’s take a look at some of the current rules and circumstances.
Annual & Lifetime Exclusions
- Any individual can give any other individual up to $13,000 each year without any gift tax consequence. This amount may be adjusted for inflation in 2012 and beyond.
- If both spouses consent, a married couple may give up to $26,000 to an individual.
- In 2011 and 2012, every individual may give up to $5 million during his or her lifetime before incurring any gift taxes. If no changes are made to federal law, this exemption will drop to $1 million in 2013 and beyond.
- Any gift exceeding the annual exclusion in any year will reduce your available lifetime exclusion by the excess. You will only owe gift taxes if your lifetime gifts exceed the lifetime exclusion.
- Example 1: You and your spouse want to give significant gifts this year to your 3 children, their spouses, and your 4 grandchildren (a total of 10 people). Since you and your spouse can give up to $26,000 to any individual, you both would be able to give up to a total of $260,000 per year to these descendants.
- Example 2: You are unmarried and you want to give $100,000 to your unmarried sister. Since your gift exceeds $13,000, you must file a gift tax return. You won’t owe any gift taxes now, but because your gift exceeds the annual exemption by $87,000, your lifetime exemption will be reduced to $4,913,000 ($5 million less the $87,000).
- Marital Gifts – U.S. spouses can give unlimited amounts to each other without any gift tax consequence.
- Marital Gifts to non-U.S. spouses – A U.S. spouse can give up to $134,000 annually to a non-U.S. spouse, with adjustments for inflation possible after 2010.
- Section 529 Plans – Section 529 plans are savings vehicles used for a beneficiary’s college expenses. An individual may elect to give up to five years of gifts to a beneficiary’s “529 Plan” in one year without any gift tax consequences. For example, a grandparent can give up $65,000 (or $130,000 with a spouse) to his grandchild’s Plan in any one year.
- Others – In general, no gift tax applies to funds given to charity, educational institutions, and to medical facilities for the medical care of an individual.
If you believe your assets will never reach $5 million in your lifetime, you might feel as if the gift tax is now irrelevant to you. However, you might still pay attention for the following reasons:
- The $5 million exemption only exists for 2011 and 2012. If Congress cannot agree on gift tax rates for 2013 and beyond by the end of 2012, the gift tax exemption will revert back to $1 million. In other words, this $5 million safety zone is only guaranteed to be in place for two years and not forever.
- We have discussed at length in prior posts how “easily” your assets can reach $1 million. Regular savings into your retirement plan, plus a paid-off house, plus any inheritances, plus a significant life insurance policy could push your estate well over $1 million. A reduction from a potential $1 million exemption in 2013 would certainly have a greater impact than the reduction, illustrated in Example 2 above.
- Certain intra-family loans or other activities could be deemed as gifts by the IRS that could also reduce your exemption. We will discuss some examples in a future post.
Questions? Comments? Please voice them below.
- House Passes The Middle Class Tax Relief Act of 2010, H.R. 4853 (bonasera.org)
- Gift Tax & Tax Treatment of Gifts (press.rocketlawyer.com)
- Avoiding Section 529 Plan Pitfalls (lawprofessors.typepad.com)