The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.
The estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.
Each year, you may give any person you want as much as $13,000 without any gift tax consequences. This dollar amount is known as the annual exclusion, and it is now indexed for inflation. It will be increasing from time to time in $1,000 increments.
If you are married, the amount you can give to each person doubles to $26,000 since the person receiving the gift can receive $13,000 from each spouse. Gifts can be in the form of cash, stocks, bonds, real estate, or anything else of value. Buying real estate or bonds in the names of one or more other persons is the same as making a gift of that property to them. The value of the gift would be the amount of money you spent to buy the property or the bond.
You can also make tuition payments for any person you choose, and these payments do not count toward the $13,000 annual limit. Payments you make for medical expenses don’t count against the $13,000 limit either. However, if you make a tuition or medical payment, be sure to pay the school, hospital or doctor directly, as a check made payable to a person which is used for tuition or medical care counts towards the $13,000 annual limit.
If you want to give more than $13,000 to any one person, to the extent your gifts exceed $13,000, you will use up a portion of your $5,000,000 lifetime exemption. This is the amount each person can give away without having to pay gift or estate taxes. By way of example, if you give one of your children $45,000 this year, you can exclude the first $13,000 under the annual exclusion, and the other $32,000 will leave you with a remaining lifetime exemption of $4,967,000.
Keep in mind that if the gifts to any person exceed $13,000 during a single calendar year, you will be required to file a gift tax return by April 15th of the following year to report the gift. That is how the IRS keeps track of how much of your $5,000,000 lifetime exemption is still available. Once you have given away more than the $5,000,000 lifetime limit, you must start paying gift taxes. The estate and gift tax rate is presently 35%.
Before making large gifts, it is often a good idea to talk to an estate planning attorney. Once gifts are made, you can’t go back and do things a better way. For instance, if you are planning to make really large gifts, then it may be wise to create trusts for the benefit of your children. There are a number of important advantages to creating trusts, with few downsides.
