There are taxes on large asset transfers in the United States. One of them is the federal estate tax. To prevent people from giving away assets while they are living to avoid the estate tax, there is also a federal gift tax in place.
Kentucky inheritance laws do not allow for a state-level gift tax or a state-level estate tax. There is a state-level inheritance tax in Kentucky, but your spouse, your children, your grandchildren, your parents and your siblings are exempt from the tax.
With the exception of the inheritance tax, Kentucky inheritance laws are for the most part favorable when it comes to taxation. However, you do have to be concerned about the federal gift tax and the estate tax. Let’s look at some important facts about gifts and taxation.
Annual Gift Tax Exclusion
The reason why you are not taxed when you give someone a relatively modest birthday gift is because there is an annual gift tax exclusion. Most people will never pay the gift tax because of this exclusion.
The exact amount of the annual gift tax exclusion is periodically adjusted to account for inflation, and even the base is always subject to change via legislative mandate. This being stated, in 2016 the amount of the annual gift tax exclusion is $14,000.
You can give gifts totaling as much as $14,000 per person to any number of gift recipients per year tax-free. The total can equal any amount of money.
Since each taxpayer is entitled to this exclusion, a married couple would be able to give up to $28,000 to any number of gift recipients each year without incurring any gift tax exposure.
To give tax-free gifts using the annual gift tax exclusion, you are not confined to direct cash gift giving. There are various different structures utilized in the estate planning field to provide tax efficiency and asset protection. These would include family limited partnerships and irrevocable trusts.
If you give a share in a family limited partnership to someone in your family you are technically giving a taxable gift. The conveyance of monetary assets into an irrevocable trust can also be an act of taxable gift giving.
Many people will use the unlimited annual gift tax exclusion to incrementally fund irrevocable trusts in a tax-free manner. This exclusion can also be utilized to distribute shares in a family limited partnership tax-free.
Another Exclusion
To fully understand the situation when it comes to taxes on gifts, you have to be aware of the unified federal gift and estate tax exclusion. This exclusion exists apart from the annual gift tax exclusion.
The gift tax and the estate tax are unified. There is a $5.45 million unified exclusion in 2016. It would be possible to give a tax-free gift in a year to an individual that exceeds $14,000. However, to do this you would be forced to use some of your lifetime unified gift and estate tax exclusion.
To provide a very basic example, let’s say that you gave a gift to your son in 2016 that had a taxable value of $1,014,000. $14,000 could be given tax-free using the annual gift tax exclusion that we explained in the previous section.
The remaining million dollars could be given using a portion of your $5.45 million unified lifetime exclusion. Once again, these are two entirely separate exclusions.
As a result, there would be $4.45 million left for you to apply to the value of your estate and to any future lifetime gifts that you give that exceed $14,000 per person in a calendar year.
Medical and Educational Gifts
There are two additional gift tax exemptions that we would like to highlight. It is possible to pay medical bills for someone else as a gift free of the gift tax. You can do this for any number of people, and the total expenditures can equal any amount of money.
This exemption extends to the purchase of life insurance that would benefit someone other than yourself.
You do have to pay the medical provider or health insurer directly. You cannot give a tax-free cash gift to the recipient expecting this individual to pay for medical care or insurance.
There is also an educational exemption. If you want to pay school tuition for someone else as a gift, you could give this gift free of taxation. This exclusion does not extend to books, fees, and living expenses.
Learn More
If you would like to obtain a great deal of useful information about important estate planning topics, visit our seminar schedule page and register for the session that fits into your schedule.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
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