A gift is any transfer of money, assets or items of value, from one person to another where equivalent consideration (compensation) is not received in return for the item.
You can give up to $15,000 each year (“annual gift tax exclusion”) to as many individuals as you wish, without allocating any of your lifetime gift tax exemption. Your lifetime gift tax exemption is $11.4 million in 2019. To illustrate how the gift tax works, assume you gave $115,000 to your child in 2019. The first $15,000 is excluded from gift taxes under the annual gift tax exclusion. The remaining $100,000 is subject to gift taxes and you would have to apply $100,000 of your lifetime gift tax exemption. Therefore, after making the $115,000 gift, you would have $11.3 million of remaining lifetime gift tax exemption ($11.4 million - $100,000).
If you make a gift that is greater than $15,000, the “donor” is required to file a gift tax return (IRS Form 709) at the time of transferring the gift to the beneficiary to reflect a deduction in his or her lifetime gift tax exemption. Donors are not required to file Form 709 if the value of their gift is less than $15,000 (in 2018 & 2019) to any one individual.
Beyond the $15,000 annual gift tax exclusion, a gift may be excluded from gift taxes depending on the beneficiary.
Gifts given to a registered non-profit organization or charity are not subject to gift taxes and are excluded from your lifetime gift tax exemption.
Gifts to your U.S. citizen spouse are gifts, but there is an unlimited martial deduction, which means you can give any amount of money to your spouse without paying any gift tax or applying your lifetime gift tax exemption. However, making a gift to your spouse does not avoid an estate tax issue for your spouse. It may also create an adverse income tax situation for your spouse in the future.
Gifts to a non-citizen spouse are subject to gift taxes if the total gifts are more than $155,000 (in 2019) in a single year.
A gift may also be excluded if the gift is for a specific purpose.
Gifts for tuition made directly to the educational institution do not count against your lifetime gift tax exemption. Gifts for tuition must be used for tuition and not for books or room and board.
Medical expenses paid directly to medical providers do not count against your lifetime gift tax exemption.
Taxing gifts is a response to taxing estates. In 2019, you can pass away with up to $11.4 million of assets before you are subject to an estate tax. All assets greater than $11.4 million are subject to a 40% estate tax. Therefore, if you have $12.4 million when you pass away, then $1 million will be taxed at 40%, or $400,000 of tax. If you could simply give away $1 million before you pass to avoid the tax, no one would ever pay estate taxes. In order to prevent this, the IRS reduces your estate tax exemption for gifts you made during your lifetime.
For example, if you give away the $1 million before you die, and have $11.4 million when you pass, you won’t pay any gift taxes but you will still owe estate taxes. Why? The gift tax and estate tax work together. If you use $1 million of your gift tax exemption during your lifetime, you don’t pay any gift tax at that time, but it reduces your estate tax exemption by the same amount. Therefore if you use $1 million of your gift tax exemption today, you will only have $10.4 million of exemption when you pass away.
The use of your annual exclusion and your gift tax and estate tax exemptions can be leveraged by using discounting, sales, loans, and other techniques to transfer significant wealth beyond your $11.4 million exemption without paying any gift or estate tax.
Modern Wealth Law, APLC is comprised of expert estate planning lawyers serving Orange County. Our attorneys are highly experienced in matters of estate planning, wills & trusts, probate and asset protection for residents in Irvine, Costa Mesa, Newport Beach, Huntington Beach, Rancho Santa Margarita, Fountain Valley and throughout the OC. If you have recently received a significant gift and need your questions answered, or if you are interested discussing a comprehensive estate plan call us today at (949) 371-5003 to schedule a consultation.
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Modern Wealth Law is an estate law & probate law firm that serves Orange County, California and is located in Irvine. We specialize in estate planning, asset protection, probate litigation, trust administration and trust and estate litigation.We are located in the heart of Orange County and serve cities through out Orange County including Costa Mesa, Newport Beach, Irvine, Huntington Beach, Aliso Viejo, Mission Viejo, Laguna Beach, Tustin, Yorba Linda and other surrounding areas.Estate Planning & Probate Lawyer in Orange County, CAJohn Wong has been recognized by the State Bar of California as a Certified Specialist in the areas of Estate Planning, Probate and Trusts. If you need to... View full business profile here: Modern Wealth Law
