Before we explain some of the details, we should touch upon the marital gift/estate tax deduction. If the people involved are American citizens, unlimited assets can be transferred between spouses free of taxation. However, leaving everything to your spouse tax-free is not an estate tax efficiency strategy in and of itself, because your spouse could then be faced with estate tax exposure.
Annual Gift Tax Exclusion
Throughout 2015, there has been a $14,000 per person annual gift tax exclusion. You can give up to $14,000 to each of an unlimited number of gift recipients free of the gift tax. There are periodic adjustments to this figure to account for the rising cost of living, but the IRS has announced that in 2016, there will be no change. The $14,000 figure will remain intact.
Unified Lifetime Gift and Estate Tax Exclusion
In addition to the annual gift tax exclusion, there is also a unified lifetime gift and estate tax exclusion. You could use a portion of this exclusion to give tax-free gifts to individuals within a calendar year that exceed $14,000 per person.
For the rest of 2015, the unified lifetime gift and estate tax exclusion stands at $5.43 million. In 2016, an inflation adjustment will be applied, and it will bring the figure up to $5.45 million.
Estate Tax Efficiency
You could use your $14,000 per person, per year gift tax exclusion to transfer assets tax-free, and this can be part of your estate tax efficiency strategy if the value of your estate exceeds the amount of the exclusion. Since this exclusion is allotted to each individual taxpayer, if you are married, you and your spouse could combine your respective exclusions.
As a couple, you could give $28,000 to any number of people each year free of transfer taxes. If you do this, you would be reducing the value of your estate.
To provide an example, let’s say that you have three married children. You and your spouse could each give $14,000 to each husband-and-wife. Each family would be receiving $56,000 tax-free every year, and you would be reducing the value of your estate by $168,000 annually.
You could give direct tax-free gifts using your $14,000 per person annual exclusion, but you could also use the exclusion to fund certain types of trusts, or you could use it to distribute shares in a family limited partnership.
If you would like to discuss your tax situation or any other estate planning concern with a licensed professional, our firm would be glad to assist you. You can send us a message through the following link to set up an appointment to discuss your situation: Charlotte NC Estate Planning Attorneys.