DISCLAIMER: Estate and Gift Taxes are an entire semester at law school and probably for your local accountant as well so this is just a brief introduction into the exemption amounts that are currently Available in 2012. Even the Internal Revenue Service understands how complicated estate and gift taxes can be come so they have produced Publication 950 appropriately titled Introduction to Estate and Gift Taxes. Surprising the IRS puts it pretty succinctly,
The gift tax applies to transfers by gift of property. You make a gift if you give property (including money), the use of property, or the right to receive income from property without expecting to receive something of at least equal value in return. If you sell something for less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
In defining what is a gift for tax purposes the well document exceptions should be noted:
- Tuition or Medical Payments Made for Someone else – This area of the law has specific requirements that should be reviewed
- Gifts to your Spouse – This is based on the Unlimited Marital Deduction. Believe it or not this wasn’t always the case!
- Gifts to Political Organization for its own use
For purposes of organization we are going to break up the topic into two interrelated parts:
- Annual Exclusion Gifts; and
- Unified Credit Gifts
Annual Exclusion Gifts
In 2012 one can gift up to $13,000 per donee. So that means for all intents and purposes I can write a check to 10 or 100 of my closest buddies for $13,000 a piece and pay zero gift tax. Additionally, being married The Wife and I could elect (i.e. check a box on our 709 gift tax form) to “split gift” and give $26,000 to a donee and it wouldn’t matter whose name the asset was titled under originally.
You can only apply your annual exclusion to a gift of present interest:
“present interest” is defined as: when the recipient of the gift can “immediately and without restriction use, possess, or enjoy the gifted property”, if it’s not this “present interest” then it’s a “future interest” and therefore the annual exclusion amount of $13,000 (2011) is not available to use as a deduction from the gift
A lot of people will tell you the annual exclusion amount is $10,000 because someone told them that in the past. They are misinformed. It was $10,000 but it was indexed to inflation at $1,000 increments.
So what if you gift a future interest or if you go over the bright line $13,000/$26,000?
Unified Credit Gifts
Ignoring the rich recent history of the Credit Amount also referred to as the Credit Shelter Amount the amount one can leave another person at death or gift during life is currently $5,000,000. So when you go over the annual exclusion amount or make a non-present interest gift you are supposed to file a 709 tax form and let the government know that you are eating into this amount.
Currently, as the law is written this amount for both estate and gift tax purposes is set to sunset back to pre-2001 levels to $1,000,000. I don’t think it will happen but think about how many more people will be effected by estate and gift taxes at that point.