In order to understand the gift tax, you have to absorb some background information about the federal estate tax. This levy carries a 40 percent maximum rate, so it can significantly impact your legacy if you are exposed.
The good news is that most people don’t pay the tax, because there is a high credit or exclusion. This is the amount that can be transferred before the estate tax would be applied on the remainder. At the time of this writing, the exclusion is $11.58 million.
You do not have to be concerned about the tax if you are transferring a great deal of property to your spouse, because there is an unlimited marital deduction. This deduction can be used to transfer any amount of property to your spouse tax-free.
Since 2011, the estate tax exclusion has been portable. This means that a surviving spouse could use their deceased spouse’s exclusion along with their own.
Federal Gift Tax
The federal estate tax was originally enacted in 1916, and at first, people could give lifetime gifts to their loved ones to avoid the tax. This loophole was closed in 1924, but the gift tax was reenacted two years later.
In 1932, the gift tax was reestablished, and it was unified with the estate tax in 1976 when the generation-skipping transfer tax was enacted. Prior to the enactment of the generation-skipping transfer tax, wealthy people could leave assets to their grandchildren tax-free.
The $11.58 million exclusion that we have in 2020 is a unified exclusion. It applies to generation-skipping transfers, large gifts, and your estate.
Annual Gift Tax Exclusion
In addition to this unified lifetime exclusion, there is another gift tax exemption that you can take advantage of if you are going to face estate tax exposure. The annual gift tax exclusion allows you to give as much is $15,000 each year to any number of recipients free of taxation.
This may not sound like a lot of money if you are in possession of more than $11.58 million in wealth, but it can add up if you use it consistently. This is a per person exclusion, so if you are married, you and your spouse could give $30,000 to an unlimited number of people each year.
For example, if you had three married children, you could give $30,000 to each of the six people. That would allow you to transfer $180,000 every year tax-free, and as you are doing this, the value of your estate would decrease.
Additional Gift Tax Exemptions
If you want to pay school tuition for family members (or anyone else for that matter), you can do this without facing any gift tax exposure. The educational exclusion does not extend to books, fees, and living expenses, and you have to pay the institution directly.
Of course, when it comes to those additional expenses, you could provide added support through the utilization of the $15,000 per person annual exemption.
The other exclusion allows you to pay medical bills for others, and this includes the payment of health insurance premiums.
Attend a Free Webinar
We are conducting a series of webinars over the coming weeks, and you can walk away with a great deal of useful information if you attend one of these sessions. There is no charge, but we ask that you register in advance so that we know how many people to expect. You can see the dates and obtain registration information if you visit our webinar schedule page.
Need Help Now?
If you already know enough to recognize the fact that it is time to put an estate plan in place, our doors are open. We would be glad to gain an understanding of your situation, make the appropriate recommendations, and help you devise a custom crafted plan if you decide to go forward.
You can schedule an appointment right now if you give us a call at 808-531-5391, and you can alternately send us a message through our contact page.