Estate Planning Newsletter

• Homicide & Estate Planning
  If a person murders a relative, is he/she entitled to receive any of the victim’s property? In most cases, the answer would be “no.” Usually, a convicted killer cannot inherit a victim’s property, even if he/she... Read more.
• Probate
  Probate, a Latin term meaning “to prove the will,” is a court-supervised process that settles a person’s affairs after death. To ensure that the decedent’s final matters and wishes are handled correctly... Read more.
• Effect of Separation and Divorce on Estates and Trusts
  Most people are aware that a surviving spouse is usually entitled to inherit all or a large portion of the estate of a deceased spouse. Fewer understand the effect on estates if one spouse dies during a legal separation or after a... Read more.
• Filing a Death Claim When an Insured Person Dies
  The beneficiary of a life insurance policy is the person entitled to receive the death benefit of the policy when the insured person dies. In order to collect on a death benefit claim, the beneficiary must usually comply with specific... Read more.

• Estate Planning and Business Transition Considerations for Year-End Preparations
• Estate Planning Benefits Gain Momentum
• Enjoying the Ride: Estate Planning
• Three Overlooked Benefits of Estate Planning
• Expert advice on digital estate planning

Gift Tax and the Annual Exclusion

A gift tax is a tax on the privilege of making gifts to others while the taxpayer is still living. The gift tax supplements the estate tax, which taxes gifts made upon death. The gift tax was created to frustrate the attempts of those who tried to evade the estate tax by gifting away all of their assets prior to death.

What Constitutes a Gift?

The Internal Revenue Service (IRS) takes a broad view of what constitutes a gift. The IRS advises that gift taxes may apply to the transfer of any property or assets or the use of income producing property, without expecting something of equivalent value in return. Selling something for less than full value or making an interest-free or reduced interest loan may constitute a gift. A gift can be direct, such as a cash gift to a child, or indirect, such as a cash gift to a child’s trust.

The Annual Exclusion

The annual gift tax exclusion is the amount that the taxpayer may gift in a calendar year to an individual without being subject to any gift tax. The annual gift tax exclusion amount was increased to $14,000 per recipient beginning in 2013, subject to adjustment for inflation. Gift tax applies to the amount of the gift in excess of the annual gift tax exclusion.

Additionally, if both spouses consent, they may split the gift so that it is considered as having been made one-half by each spouse. The annual exclusion amount is thereby doubled to $28,000 per individual recipient.

While gifts between U.S. citizen spouses are generally not subject to any gift tax, the annual exclusion for gifts made by U.S. citizens or residents to their non-U.S. citizen spouses is $143,000 for the year 2013, subject to adjustment for inflation.

The Exclusions are not Cumulative

The annual exclusion is not cumulative, therefore the taxpayer cannot withhold making a gift to his child one year, in the anticipation that in the following year he can make a gift twice as generous free of gift tax. Also, the annual exclusion for gifts does not reduce the available lifetime credit for estate and gift tax.

Unlimited Exclusions for Certain Gifts

If a taxpayer pays tuition directly to a qualified educational institution, or pays a health care provider directly for medical services, such payments are not subject to gift tax, and are not counted toward the $14,000 annual exclusion from gift tax for the individual benefiting from the payment. A common misconception is that this exclusion for education and medical expenses only applies where the taxpayer and the individual benefiting from the payment are related, or where there is a duty on the part of the taxpayer to make such payment. Regardless of the relationship between the taxpayer and the individual benefiting from the payment, direct payments for educational or medical expenses are not subject to gift tax.

Filing a Gift Tax Return

Federal tax law requires taxpayers to file a special gift tax return by April 15 of the year following the gift when:

• Gifts were given to at least one person (other than a spouse) that exceeded the annual gift tax exclusion amount for the year.
• The taxpayer and spouse are splitting a gift.
• A gift was given, other than to a spouse, that cannot be possessed or enjoyed, or income cannot be received from it, until some time in the future.
• The taxpayer gave a spouse an interest in property that will end sometime in the future.

A gift tax return is not required for gifts to political organizations or for payments of another’s tuition or medical expenses.