The most fundamental part of any gifting program is the federal gift tax annual exclusion. This exclusion allows a taxpayer to make a maximum gift of $14,000 (for 2017) each year to an individual free of tax and reporting (i.e., there is no need for the taxpayer to file a gift tax return). This is not a cumulative amount; a taxpayer can gift the maximum amount to as many individuals as he or she wishes. For example, a taxpayer with three children could make tax-free gifts totaling $42,000 to those children ($14,000 to each child). A married couple could double that to $84,000 ($14,000 per taxpayer per child). All of this would all be free from gift tax. It would also be free from reporting so long as the gift is cash and not some other form of property. The cumulative effect of the exclusion is very powerful and can accomplish many gifting goals.

For people who wish to make larger gifts, the lifetime gift tax exemption can be used to cover any amounts in excess of the annual exclusion. The lifetime exemption for each taxpayer is currently $5.49 million (for 2017). However, any amounts gifted that are over the annual exclusion amount to any individual must be reported on a gift tax return (Form 709) filed by the taxpayer for the year in which the gift was made. Furthermore, any gifts in excess of the annual exclusion reduce what can be sheltered from the estate tax at death. This is because the lifetime exemption is a “unified” exemption – a taxpayer can use it to either shelter gifts during life or amounts given at death.

If a donor is uncomfortable making large outright gifts to someone, both the annual exclusion and the lifetime exemption are available for gifts made to a trust (so long as the trust is structured properly). Furthermore, gifts of assets that are eligible for valuation discounts (e.g., minority interests in closely-held businesses or fractional interests in real estate) can further leverage the amounts transferred, shift future appreciation of the gifted assets to descendants, and help minimize estate taxes at death.

A gifting program using the annual exclusion and lifetime exemption is the foundation on which many wealth transfer techniques rest, including business succession strategies and the purchase of life insurance. If you would like to explore other ways in which a gifting program can be structured to accomplish your goals, please contact one of our estate planning attorneys – http://www.lasher.com/practice-areas/estate-planning-trusts-probate.