UNDERSTANDING THE ANNUAL GIFT TAX

EXCLUSION

Learn How You Can Optimize the Value of Your Annual Gift Tax Exclusion and Mitigate Your Estate Tax Exposure

GERALD M. DORN
Understanding the Annual Gift TaxNEVADA ExclusionESTATE PLANNING www.wealth-counselors.com RENO ATTORNEY

When you first hear about the existence of the federal estate tax you may get a bright idea. You could just give away assets while you are living to avoid this death tax. Actually, this used to be possible years ago for a limited amount of time. The estate tax was enacted in 1916. For a while, there was no gift tax. As a result, wealthy families would in fact give gifts to avoid the estate tax. In 1924 the gift tax was enacted to close this window of opportunity. It was repealed in1926, but it was reenacted in 1932, and it has been in place ever since. In 1976 it was unified with the estate tax. This was the same year that the generation-skipping transfer tax was enacted.

UNIFICATION OF TRANSFER TAXES

These three taxes on asset transfers are unified. There is a $5.34 million lifetime exclusion or credit in 2014. Asset transfers that exceed this amount are potentially taxable. Taxable transfers can take place while you are living or after you pass away. The maximum rate of these levies is 40 percent under existing laws.

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The reason why we state that the transfers that you make exceeding the exclusion are potentially taxable is because there are legal steps that you can take to mitigate your exposure.

AN ADDITIONAL EXCLUSION
The lifetime $5.34 million unified transfer tax exclusion is not the only exclusion that can be utilized when you are planning your estate. There is also an annual gift tax exclusion.

This exclusion sits completely apart from the unified exclusion. At the current time, the amount of the annual gift tax exclusion is $14,000. Each year you can give gifts to any number of people totaling as much as $14,000 per recipient free of the gift tax without using any of your unified exclusion. If you are thinking that $14,000 is not a lot of money when you are talking about an estate valued in excess of $5.34 million, this gift tax exclusion can actually add up over time.

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Since it is a per person exclusion, you have $14,000 per person, per year to utilize, and your spouse has the same annual exclusion available. This gives a couple the ability to transfer $28,000 to any number of gift recipients each year. If you have married children, you could transfer $56,000 to each couple annually. If you do this over an extended period of time, a significant sum of money could be transferred tax-free. Actually transferring assets tax-free is part of the benefit. But at the same time, you are reducing the amount of your taxable estate along the way. To take advantage of this exclusion you do not have to give cash gifts in real time. People will often utilize the exclusion to incrementally fund irrevocable trusts in a tax-free manner. You could also use the exclusion to distribute shares in a family limited partnership on an annual basis without incurring any gift tax liability.

The reason why we state that the transfers that you make exceeding the exclusion are potentially taxable is because there are legal steps that you can take to mitigate your exposure.

TAX-FREE MEDICAL GIFTING

While we are on the subject of tax-free gifting, we would like to mention the fact that there is a medical exemption. You may pay medical bills for others free of the gift tax. To take advantage of this exemption you must pay the health care provider directly. You cannot give tax-free medical gifts to the patient.

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This medical exemption extends to the purchase of health care insurance for the benefit of someone else.

EDUCATIONAL EXEMPTION
It is also possible to pay for school tuition as a tax-free gift. Once again, you must pay the institution directly. You cannot give the money to the student if you want to utilize this exemption.

This is a tuition-only exemption. You cannot use it to pay for living expenses, books, fees, etc.

CONCLUSION
Let's look at what we have learned. There is a gift tax, an estate tax, and a generation-skipping transfer tax. The three taxes are unified. There is a lifetime $5.34 million unified exclusion. There is also a $14,000 annual gift tax exclusion. You can give gifts to an unlimited number of recipients totaling as much as $14,000 per person tax-free each year. These gifts would not impact the amount of your available unified transfer tax exclusion. You can also pay medical bills and school tuition for others tax-free without using any of your unified exclusion.

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If you are interested in learning how you can optimize the value of your annual gift tax exclusion, arrange for a consultation with a licensed estate planning attorney.

REFERENCES
Collaborative Research Project http://lobby.la.psu.edu/027_Estate_Tax/frameset_estate.html Forbes http://www.forbes.com/sites/janetnovack/2012/10/14/the-forbes-guide-toestate-planning/

Understanding the Annual Gift Tax Exclusion

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About the Author

Gerald M. Dorn
Gerald Dorn is a shareholder and has been a partner at Anderson, Dorn & Rader, Ltd. Since 1998. Mr. Dorn has extensive experience serving wealthy families and business owners in the development of estate, tax and asset protection planning strategies. He made the decision to focus his practice in the area of estate planning after witnessing the personal grief and financial loss suffered by several of his clients as a result of poor planning. These experiences motivated him to dedicate his professional life to assisting his clients to preserve their lifes work for their heirs and to create a lasting legacy for those they love. Mr. Dorn is able to accomplish his mission through the use of a vast number of estate planning tools, both basic and advanced, for all of his clients at Anderson Dorn & Rader, Ltd. Just out of law school, Mr. Dorn helped to found Harris & Dorn, LLP., a private firm in San Diego that concentrated on family law, estate planning and probate cases. Mr. Dorn relocated the Reno area when he was offered a position as general counsel to a national estate planning company, drafting documents and teaching continuing legal education classes to attorneys, financial planners and accountants. Mr. Dorn is a frequent author and lecturer on such topics as Revocable Living Trusts, Family Limited Partnerships and Family Limited Liability Companies, Irrevocable Trusts, Tax Planning with Life Insurance, Charitable Remainder Trusts, Charitable Lead Trusts, Private Foundations, Qualified Personal Residence Trusts, Dynasty Trusts, Sales to Defective Grantor Trusts, Estate and Tax Planning for IRAs and Qualified Plans, Trust And Estate Administration and Asset Protection. He is a member of WealthCounsel, LLC, WealthCounsel Advisors Forum, InKnowVision, LLC, the State Bar of Californias Estate Planning, Trust and Probate Law Section, the American Bar Associations Real Property, Probate and Trust Law Section and the Washoe County Bar Association. Anderson, Dorn, & Rader, Ltd. Legacy and Wealth Planning Attorneys 500 Damonte Ranch Parkway, Suite 860 Reno, NV 89521 Phone: (775) 823-9455 Fax: (775) 823-9456

Understanding the Annual Gift Tax Exclusion

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