Dear Jonathan: I am a widower. I am retired and financially set. In fact, I have been advised that it would be a good idea for me to reduce the size of my estate because it is larger than that amount which is exempt from estate taxes, which I believe is $5 million. Consequently, I am considering passing along a good chunk of my estate to my children and grandchildren now. What are the current rules for gifting?
Jonathan Says: In 2014, a person can gift up to $14,000 per person per year without incurring any federal gift tax and without having to report the gift to the IRS by filing a gift tax return. As an example, if you have four children, and each of your children are married and have four kids of their own, this year you can make gifts of $14,000 to each child and his or her spouse, as well as each grandchild without any gift tax consequences. By making these gifts you will have removed $336,000 of value from your estate (24 people x $14,000). Further, if you give away assets that are likely to appreciate in value, you are also removing all of that future appreciation from your estate. Finally, if you are so inclined, you can make gifts to the same people (or different or additional people) in 2015 and the years following.
In your question, you indicated that you wanted to pass along a “good chunk” of your estate. If your definition of “good chunk” is larger than $336,000, you can increase the number of annual $14,000 gifts you make and/or you can make taxable gifts over and above the $14,000 annual gift tax exclusion. In other words, you are not limited by the annual gift tax exclusion when making gifts, however, any gifts that you make in excess of the $14,000 annual gift tax exclusion will be deemed to be a taxable gift.
Further, if you make taxable gifts, you are required to file a gift tax return with the IRS reporting those gifts.
Also, the total amount of taxable gifts you make over your lifetime will serve to reduce your lifetime gift and estate tax exclusion, which is $5.34 million (not $5 million) in 2014.
For example, let’s say that rather than making gifts of $14,000 to each of your children and their spouses and your grandchildren, you decide you want to make gifts of $50,000 to each of those individuals. In this example, the additional $36,000 per individual ($50,000 gift less $14,000 annual exclusion) will be deemed to be a taxable gift which will serve to reduce your lifetime gift and estate tax exclusion by $864,000 ($36,000 x 24). If you make gifts to the same people in the same amount for two consecutive years, you will have removed a total of $2,400,000 of value from your estate (and all future appreciation tied to the gifted assets) but you will have also reduced your available lifetime gift and estate tax exclusion by the total amount of taxable gifts made over those two years, i.e., $1,728,000.
Before making any gifts, I recommend that you meet with an estate planning attorney or tax consultant who can explain to you in more detail the pros and cons of gifting, as well as the tax implications and requirements you will need to be familiar with before entering into a gifting program. Good luck.
Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, P.C., in Grand Rapids, Mich.
