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Annual Gifting and Estate Planning

I’m quite often am asked how much can I gift to a loved one.  Well the simple answer is “Whatever you want”, but there could be implications you need to be aware of if you did that.  So let’s get started.

Let me first give you two important terms you need to remember since they are linked together:

Annual Gifting Maximum and,

Lifetime Exemption

The annual gifting maximum is the amount you are allowed to give to any number of other people without it reducing your Lifetime Exemption.  Currently, the Annual Gift Maximum stands at $14,000 per person and is indexed to inflation.

Generally speaking, your Lifetime Exemption is the amount you can transfer at death without federal estate taxes kicking in. Under current law, the Lifetime Exemption amount is $5.34 million and is indexed to inflation.  It used to be much lower but that’s where it stands at the moment unless the law changes which it could.

So under current law if you pass away this year, $5.34 million will not incur federal estate taxes.  Keep in mind some states still have a state estate tax though.

So let’s break it down so you can see how annual gifting can affect your lifetime exclusion.  Let’s say you give a loved one $114,000 this year.  Well that’s $100,000 higher than the $14,000 maximum allowed this year.   So, your lifetime exemption will be reduced by $100,000 and will decline from $5.34 million to $5.24 million.  Instead of $5.34 million being able to transfer federal estate tax free at that person’s death, only $5.24 can transfer.

So be careful about giving away more per year per person than you are allowed, because it could trigger hefty taxes.  Keep in mind, you and your spouse are two separate people so if done properly the two of you can gift $28,000 to each person instead of $14,000.

This has been John Williams, with Smart Financial Future.  Don’t hesitate to let us know if you have any questions.  We’ll see you next time.