Avoid the Estate Tax and Gift Tax and Still Make Lifetime Gifts?

Share this post
gifts and avoiding estate tax

How can I avoid the estate tax and gift taxes and still make gifts During my lifetime?

Gifts can be categorized as present interest or future interest gifts. A present interest gift means the person receiving it has immediate possession or enjoyment of the gift. A future interest gift is the opposite of a present interest gift, meaning no immediate possession or enjoyment of the gift. Most future interest gifts involve transfers to a trust where the beneficiary does not have the immediate use or possession of the trust property.

A present interest gift may or may not be taxable. For 2015 you may make present interest gifts up to $14,000 per person per year; known as “annual exclusion gifts.” This amount if indexed for inflation and periodically increases. This results in a tax-free gift to the person receiving the gift. A future interest gift is always taxable.

However, for present interest gifts beyond the $14,000 per person limit, and for all future interest gifts, there is a lifetime exemption (described in the question above) to use against those taxable gifts. The giver, not the receiver, normally pays the gift tax.

For example, assume that the size of your estate is such that estate taxes will be due at your death, and you have six children. You might want to reduce the size of your estate (and thereby the estate taxes) by making a tax-free gift to each of your children every year. Since the annual tax-free (present interest) gift is $14,000 per person or a total of $84,000 per year ($14,000 x 6 children).

If a gift can avoid the estate tax can, what About Gift Tax?

The gift tax is a tax levied on any unilateral transfer (a gift) from one person to another. This applies to any kind of taxable assets, including cash, securities and real estate. When the gift tax applies, it is the donor who pays, meaning that if you give a taxable gift you owe any applicable taxes. If you receive a gift, it is rare, if ever, that you owe taxes. It is exceedingly rare for someone to owe money due to the gift tax. This tends to apply only to the wealthiest of households due to the tax’s high exclusions. This is because the purpose of the gift tax is to prevent wealthy families from avoiding the estate tax by simply gifting all their money to each new set of heirs. Here’s what you need to know.

What Is the Gift Tax?

Per the IRS, this is a tax levied on “[a]ny transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” If you give something of value and get less than it is worth in return, it is considered a gift and may be taxable under this law.