Giving it away tax-free and other legal advice
Dear Jonathan: I know that the annual gift tax exclusion for 2014 was $14,000. Is this amount being increased for 2015, or is it staying the same?
Jonathan says: The annual gift tax exclusion for 2015 will remain at $14,000.
Dear Jonathan: How much will a person be able to shelter from federal estate tax in 2015?
Jonathan says: The federal estate tax exemption will increase in 2015 from 2014’s amount of $5.34 million to $5.43 million dollars for a single person. A husband and wife will be able to shelter $10.86 million dollars from federal estate taxes in 2015.
Dear Jonathan: I am going to be making multiple gifts to my grandchildren in 2015. I have 10 grandchildren so it is my understanding that I can make gifts of $14,000 to each one of those grandchildren without any consequences. Is this correct? Do these gifts reduce the amount that is excluded from federal estate taxes when I die?
Jonathan says: You are correct in that you can make gifts of $14,000 (known as annual exclusion gifts) to each of your 10 grandchildren without any gift tax consequences. This means that there are no gift taxes associated with the gifts and no gift tax returns need to be filed. Further, any such gifts you make will not serve to reduce your federal estate tax exemption.
If, on the other hand, you were to make gifts in excess of $14,000, then the excess amount of each gift will be considered to be a taxable gift for which you will have to file a gift tax return. Although no gift tax will need to be paid by you upon making the gift or the filing of the gift tax return, the taxable portion of each gift will serve to reduce the amount you can give away at death tax free. A couple of examples should help illustrate this point.
Example 1: Instead of making $14,000 gifts to your grandchildren this year, let’s say you make gifts of $50,000 to each grandchild and you die at the end of this year subsequent to your making those gifts. The first $14,000 of each gift is an annual exclusion gift and has no gift tax consequences. The remaining $36,000 of each gift is a taxable gift for which a gift tax return will need to be filed.
Further, the total amount of taxable gifts made this year will serve to reduce the amount you can give away upon your death tax-free. The amount you can give away this year death tax-free is $5.43 million dollars. This amount will need to be reduced by the total amount of taxable gifts you made this year, i.e., $360,000 ($36,000 x 10 grandchildren) leaving a balance of $5,070,000 which you can give away death tax-free this year.
Example 2: You make $50,000 gifts to each of your 10 grandchildren for 10 straight years and then you die in the 10th year after making that year’s gifts. For purposes of this example, I will assume that the annual gift tax exclusion remains at $14,000 and the federal estate tax exemption remains at $5.43 million dollars for each of those 10 years. As stated in Example 1, the first $14,000 of each gift may be given away gift tax-free, but the remaining $36,000 will be deemed to be a taxable gift. Consequently, for each of the 10 years you will have made taxable gifts of $360,000, for a total of $3.6 million dollars.
When you die in the 10th year, the $3.6 million dollars of taxable gifts you made during that 10 year period will be subtracted from the federal estate tax exemption amount of $5.43 million dollars which will leave just $1.83 million dollars of your estate exempt from federal estate tax.
Before engaging in any type of gifting, I recommend that you consult with an estate planning attorney and/or tax professional.
Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, P.C., in Grand Rapids, Mich.