I Heard That I Can Make Gifts During My Lifetime to Avoid the Estate Tax, and Avoid the Gift Tax as Well. Is This True?

Share this post

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).