Under current rules, the IRS will impose an Estate Tax on the estates of decedents who passed away in 2014 with a net value in excess of $5,340,000. Many individuals with a high net worth that may be subject to the Federal Estate Tax upon their death often take advantage of the IRS’ Annual Exclusion for gifting to individuals. This is a proactive strategy to minimize overall tax liability and let you pass on wealth without penalizing your benefactors. The current Annual Exclusion for gifting to any individual in 2014 is $14,000.
Gifting is a way for people with larger estates to pass their wealth on to their family in smaller increments each year tax free. Gifts made to any individual (donee) in excess of the Annual Exclusion amount of $14,000 in 2014 require the donor to file a Gift Tax Return (IRS Form 709) to report the gift. The reported amount gifted in excess of the Annual Exclusion amount is credited toward the donor’s lifetime Federal Estate Tax exemption of $5,340,000 (currently for decedents who pass away in 2014).
A donor may gift up to $14,000 annually to any number donees in a calendar year without filing a Gift Tax Return. A married donor may gift up to $28,000 to any donee, provided that the donor elects to split the gift with his or her spouse. Such gifts may be cash, stocks and bonds, a fractional interest in real estate or any other asset as long as the value is within the annual exclusion amount. These annual exclusion gifts over time will reduce the size of the donor’s taxable estate, while at the same time pass the donor’s wealth to family members without having the gifts subject to the Federal Estate Tax.
As we are nearing the end of the year, persons with substantial wealth (in excess of the $5,340,000 Estate Tax Exemption or $10,680,000 for a married couple) may want to consider making Annual Exclusion gifts up to $14,000 per donee to family members to reduce the size of their taxable estate, since the IRS does not treat gifts as taxable income to the donee. It’s a win-win strategy that keeps wealth within the family.