I am constantly asked this question by many of my clients and it is probably the question with the most confusion. However, let’s talk about the basics! In 2015, you can give away or gift up to $14,000 of your own assets without any tax consequences. In addition, you can give away up to $28,000 of you joint assets that you hold with a spouse without any tax consequences. However, if you give away more than $14,000 in a given year that does not necessarily mean you are going to owe any taxes on the gift.
In 2012, the Federal Estate and Gift Tax was amended to create a lifetime exemption from the federal estate tax of $5.25 million, which is indexed annually for inflation, for a 2015 exemption of $5.43 million. The federal estate tax is a tax on the passing of wealth from one generation to another at death. However, as you can see, based upon the $5.43 million exemption, very few families have to worry about the federal estate tax. In addition, with the 2012 amendments, the Federal Estate and Gift Tax made portability permanent. This term means that, for a married couple, the first spouse to pass away may transfer their unused federal estate tax exemption to the second spouse. This can technically create a $10.86 million exemption from the federal estate tax in 2015.
However, you are probably asking yourself, “What does all this have to do with how much money I can give away each year?” Well, the name of the law is called the Federal Estate and Gift Tax. Under this law, you can give away $14,000 each year without any tax consequences. However, if you give away more than $14,000 in a year, the amount over the $14,000 limit reduces your federal estate tax exemption that your family would use at your death toward the calculation of your estate tax liability.
For example, let’s say that John and Jane wanted to make a series of gifts to their children Ashley and Pete each year in the amount of $25,000 each for a total gift of $50,000 each year, and that John and Jane wanted to do this for five years. First, John and Jane went to visit their estate planning attorney to set this up before making this decision and their estate planning attorney told John and Jane they could give away $28,000 of their joint assets to their children without any tax consequences. However, the amount over $28,000 would reduce their lifetime estate tax exemption. John and Jane’s estate planning attorney told them that after Year 1 their estate tax exemption would be reduced by $22,000 ($50,000 minus $28,000), at the end of Year 2 their estate tax exemption would be reduced by $44,000, at the end of Year 3 their estate tax exemption would be reduced by $66,000, at the end of Year 4 it would be reduced by $88,000, and finally at the end of Year 5 it would be reduced by $90,000.
John and Jane’s estate planning attorney told them that after five years their lifetime estate tax exemption would be reduced from $10,860,000 to $10,770,000. Finally, John and Jane’s estate planning attorney told them that just because they gave this much money away over the next five years did not mean that they would owe any taxes or that their kids would owe any taxes. However, if their estate exceeded $10.77 million when the second spouse died, then their estate would owe estate taxes and their children would have to pay these taxes out of the proceeds of the estate before their estate could be settled.
Therefore, just because you give away more than $14,000 or $28,000 of joint assets in a given year, does not mean that you will owe any taxes. It simply means that your lifetime estate and gift tax exemption will be reduced by the amount over the $14,000 or $28,000 annual limit. Therefore, a tax may be assessed upon your death, but only if you have reduced your lifetime estate tax exemption limit due to annual gifts over the $14,000 annual limit, and that tax would not be due until nine months after the date of your death.