Pioneers and nationally recognized leaders in estate planning.

650.493.8070 local

800.244.9424 toll-free

If Used Properly, Annual Gift Tax Exclusion Can Be the Gift That Keeps on Giving

Natural instinct often urges parents to help their children financially. But when they seek to do so, they must be mindful of the interest the federal government will collect. Transfers of wealth that exceed an exclusionary level are subject to the federal gift tax. Fortunately, with careful planning, a grantor can limit or exclude the government from taking a cut of the proceeds.

The government permits an annual exclusion amount, currently set at $14,000 per year. That sum is not subject to either reporting or taxation. And that figure can effectively be doubled through the procedure known as gift-splitting, whereby each spouse exercises the annual exclusion and sends a combined $28,000 tax-free gift to a child.

The gift-splitting provision can be especially useful when a couple wants to help their married child with a big-ticket item (such as the down payment for a house). If the gifts are properly timed, a respectable sum can be transferred tax-free in short order.

For example, a couple using the gift-splitting provision could give $28,000 to a married child and another $28,0000 to that child’s spouse during Christmas week. Then, they would repeat the process during the following New Year’s week. Within the two holiday weeks, the younger couple would have amassed $112,000 tax free. If parents take this route, they better be sure they like their son-in-law!

The annual exclusion gift is not limited to use for parent-to-child transfers. Indeed, anyone is entitled to give anyone else — relatives, friends or even total strangers — the annual exclusion gift. In addition, the annual exclusion gift is not considered part of a person’s $5.3 million exemption from the estate tax.

Yearly gifts larger than $14,000 are not likely to result in gift tax exposure, but they must be reported to the IRS.

While most gifts take the form of cash, neither the gift nor the annual exclusion must be in that form. Gift-givers can transfer a massive variety of assets, including artwork, boats, businesses, family heirlooms, homes, stocks and bonds. When a gift is anything other than cash, the government requires appraisal. The assets are best held in a revocable trust in which ownership stakes are recorded and maintained.

Whenever asset transfers are contemplated, the advice of an experienced estate-planning attorney is simply essential. There are smart, protective ways to give gifts. Too often, mistakes and unpleasant surprises result from more casual approaches.