In the United States, every person that dies with more than a certain amount is charged a “death tax” on the excess if the money goes to anyone besides their spouse. Currently, the limit is $3,500,000 per person.
To keep people from avoiding estate taxation by giving away all their money right before they die, the IRS also puts limits on the amount you can gift in any one year to any one person, as well as a cumulative limit over their lifetime for gifts that exceed the annual exemption amount.
In 2009, this annual gift exclusion is $13,000 per recipient, per year. The lifetime gift limit is $1,000,000. Anything you give in excess to $13,000 per recipient, per year is essentially subtracted from the lifetime limit of $1,000,000. This simultaneously reduces the amount the can be transferred tax-free at death.
The Internal Revenue Service announced in late October that the annual gift tax exclusion for 2010 will be $13,000, the same as in 2009. The annual exclusion allows every individual to give $13,000 to each family member or other beneficiary without any transfer tax implications. If only one spouse makes a gift to an individual, the donor and his or her spouse can elect to treat a gift to an individual as though each spouse made one-half of the gift to the individual, effectively allowing a married individual to double the benefit of the annual exclusion to $26,000 if the non-donor spouse makes no annual exclusion gifts to the done in the same calendar year.
Now let’s suppose you give a gift of $14,000 instead of $13,000. This is not a problem for you or your son, except you exceeded the annual exclusion by $1,000. You would need to file form 709, but you will not owe any gift tax. You are allowed to give $1,000,000 lifetime over the annual exclusion of $13,000 per year. So in this case, your $1,000,000 lifetime gift tax exclusion will be reduced to $999,000.
Given the above, the potential estate tax savings offered by the annual gift tax exclusion can be substantial. For example, suppose a mother and father with a large estate have two married children and four grandchildren. Mother and father could transfer $26,000 to each child and grandchild ($156,000 annually) without gift taxes. After five years, the gifting will have reduced mother and father’s combined estate by $780,000
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