Gift Tax Planning

A Way of Protecting Your Estate from Taxes, Creditors, and Others

Gift tax planning can help to ensure that your state stays with your family and not the government or creditor. Here are the basics about Gift tax planning. See our other report regarding Foreign gifts.

The federal gift tax applies to the giver of a gift, not the recipient, for amounts above a specified level. Most gifts are sheltered from gift tax by the annual gift tax exclusion and the lifetime gift tax exemption (or both).

For starters, you can give gifts valued up to the annual gift tax exclusion amount each year without ever touching the lifetime exemption In 2018, it increased to $15,000 per recipient.

Unlike most other IRS inflation-based adjustments, the annual gift tax exclusion increases only in increments of $1,000. Thanks to relatively low rates of inflation, it’s taken five years for the annual exclusion amount to increase.

To illustrate how it works, suppose you have three adult children and seven grandchildren. In 2020, you could give each family member $15,000 — for a grand total of $150,000 — without owing any gift tax.

The annual gift exclusion is available to each taxpayer. If you’re married and your spouse consents to a joint gift — also called a “split gift” — the annual exclusion amount is effectively doubled to $20,000 per recipient for 2020. So, in the previous example, a married couple with ten family members could gift up to $300,000 in 2020) completely exempt from gift tax.

Lifetime Estate and Gift Tax Exemption
In addition, if you gift an amount that’s above the annual gift tax exclusion, you can also tap into the lifetime estate and gift tax exemption. The lifetime exemption for 2020 effectively shelters from tax $11.58 million, indexed for inflation.

However, if you tap into the lifetime gift tax exemption, it erodes the estate tax exemption amount that would be available when you die.

For instance, suppose an unmarried individual gives gifts to family members valued at $1,150,000 in 2018. After the annual gift tax exclusion is applied to $150,000 of gifts, the lifetime exemption can shelter the remaining $1 million from gift tax. That leaves an available estate tax exemption of $10.58 million if the individual dies in 2020 (assuming the decedent hadn’t ever tapped into his or her lifetime exemption in a previous year).

Gift Tax Planning

Exceptions to the Rules
Be aware that the following gifts are generally gift-tax exempt, preserving the full annual gift tax exclusion and unified exemption:

  • Gifts from one spouse to the other spouse
  • Gifts to a qualified charitable organization
  • Gifts made directly to a health care provider for medical reasons
  • Gifts made directly to an educational institution for a student’s tuition

For instance, if your granddaughter attends college, you might pay her tuition directly to the school for the 2019-2020 school year. The payments don’t count against the annual gift tax exclusion so you could still give her $15,000 in 2020. Furthermore, you may take advantage of a special tax break for gifts made to a Section 529 plan