Year-End Annual Exclusion Gifting: Basics and Benefits

Is it better to give than to receive? If you’re trying to reduce your estate tax exposure, it sure is. But before you start giving, you need to know the basic gift tax rules of the road.

If your estate will be subject to estate tax under the current applicable estate tax exemptions, even a simple program of annual exclusion gifting over a number of years can put a serious dent in your estate’s exposure to both Federal and Illinois estate tax.

The Basics

1. Annual Exclusion. The “annual exclusion” is the amount that you (the ‘donor’) may give, to as many people (‘donees’) as you wish, per calendar year without using any estate tax exemption, paying any gift tax or even needing to file a gift tax return.
2. The Exemption Threshold. The annual exclusion amount for both 2015 and 2016 is $14,000. This figure is indexed to inflation, but it only changes once every several years in $1,000 increments.
3. Gifts Above Exemption. To the extent that aggregate gifts to any individual in a year exceeds the annual exclusion, the donor is required to report the gift(s) on a Form 709 Federal Gift Tax Return. However, while gifts in excess of the annual exclusion are reportable, no gift tax is due until and unless the donor’s lifetime exemption ($5.43 million for 2015) is exhausted.
4. Current Gifts. The annual exclusion applies only to gifts of a “current interest”, but not to a gift of a “future interest.” Most (but not all) gifts into trusts are gifts of a future interest that do not qualify for the annual exclusion. In some cases, special trust provisions can turn a future interest into a present interest.
5. Non-Gifts. Educational gifts to pay directly for tuition and gifts made to pay directly for medical care don’t count toward use of the annual exclusion. Also, gifts to a citizen spouse and to qualified charities are not subject to gift tax.
6. Spousal Gifting. Each spouse has his or her own annual exclusion. Special rules apply to allow spouses to elect “gift-splitting” for gifts made by one spouse or another. The rules in this area are fairly technical, but generally a spouse can make an election on a Form 709 to split all gifts made by both spouses during the calendar year.
7. Completed Gifts. If you’re a procrastinator, you’ll want to know that a gift must be completed to count toward the annual exclusion for the year. Again, the rules here can be technical, but as a basic matter, a check is complete not when it is written, but when it is accepted or paid by the donee’s bank.

The Benefits

Example: Jerry Generous has $7 million in assets. Jerry has three children. And each child is happily married with two children of their own.

After consulting with his estate planning attorney, on December 15, 2015, Jerry makes $14,000 annual exclusion gifts to each of his:

• Three (3) children;
• Three (3) children’s spouses; and
• Six (6) grandchildren.

On January 1, 2016, Jerry repeats the same process. Within a matter of days, Jerry has now successfully reduced his taxable estate by $336,000 ($14,000*24), without even having to file a gift tax return.

Jerry’s Federal and Illinois estate tax exposure — before and after the 2015 and 2016 annual exclusion gifts:

• Before the annual exclusion gifts:
  • $7,000,000 estate
  • $967,363 Federal & Illinois estate tax due upon death
• After the annual exclusion gifts:
  • $6,664,000 estate
  • $810,085 Federal and Illinois estate tax due upon death
• Total Savings: $157,278 estate taxes (almost half of the gifts!)

Of course, everyone’s situation is different and this is just one basic example. If you’re considering a gifting program to reduce estate tax exposure, it’s always a good idea to discuss with your estate planning attorney and to coordinate with your overall estate plan.

Happy ThanksGIVING everyone!